Homeowners can claim a federal tax credit for making certain improvements to their homes or installing appliances that are designed to boost energy efficiency. Solar, wind, geothermal, and fuel cell technology are all eligible for the residential energy efficient property credit.
The credit has been extended many times, and as of December 2021, if you make energy-efficient home improvements before Jan. 1, 2024, you are eligible to reduce the amount of taxes you owe. Learn more about the regulations of the credit and how to qualify.
The Residential Energy Efficient Property Tax Credit
If you install alternative energy equipment to ensure your home is energy efficient you can claim the residential energy efficient property credit. However, there are specific, applicable percentages to qualify based on when you make the changes:
- 30% for property placed in service after Dec. 31, 2016, but before Jan. 1, 2020
- 26% for property placed in service after Dec. 31, 2019, but before Jan. 1, 2023.
- 22% for property placed in service after Dec. 31, 2022, but before Jan. 1, 2024
The tax credit you're eligible for is a percentage of the cost of alternative energy equipment that's installed on or in a home, including the cost of installation. Solar hot water heaters, solar electric equipment, wind turbines, and biomass fuel cell property (as of Dec. 31, 2021) are examples of equipment that's eligible for this tax credit.
There's no dollar limit on the credit for most types of property, but the credit for biomass fuel cells is capped at $500 per half-kilowatt of power capacity.
This tax credit isn't refundable, so the IRS won't be sending you the difference in cash if your credit is more than any tax you owe on your return. The unused portion can be carried over to your following year’s tax return, however, so you won't lose it.
The property must be located in the United States, but it doesn't have to be the taxpayer’s main residence unless the alternative energy equipment is a qualified fuel cell property. The equipment must be installed in your principal residence in this case. Both existing homes and homes under construction are eligible.
You can't claim the residential solar credit for your rental properties. You must live in that property for part of the year, only using it as a rental when you're away, to be eligible for the tax credit.
If Congress does not renew it, the credit for alternative energy equipment will end for property placed in service after Dec. 31, 2023.
The Nonbusiness Energy Property Credit
The nonbusiness energy property credit initially expired at the end of 2017, but then it was reinstated through December 31, 2021. In 2022, the year in which you file your 2021 tax return, you can claim the credit if you made eligible home improvements in 2021, and also meet other requirements.
The first part of this credit is worth 10% of the cost of qualified energy-saving equipment or items added to a taxpayer’s main home during the year. Energy-efficient exterior windows and doors, certain roofs, and added insulation all qualify, but costs associated with the installation aren't included.
The second part of the credit isn't a percentage of the cost, but it does include the installation costs of some high-efficiency heating and air-conditioning systems, water heaters, and biomass fuel stoves. Different types of property have different dollar limits.
The main home must have been located in the United States to qualify for this credit, and it's only available for existing homes, not homes that are under construction.
This isn't a particularly generous tax credit. In 2022, the credit is limited as follows:
- There is a total combined credit limit of $500 for all tax years after 2005—you can't claim $500 per year.
- For windows specifically, there is a combined credit limit of $200 for all tax years after 2005.
- A limit for residential energy property costs in 2021 of $50 for an air circulating fan; $150 for any qualified natural gas, propane, or oil furnace, or a hot water boiler; and $300 for any item of energy efficient building property.
You'll need written certification from the manufacturer that your product qualifies for the tax credit, which is typically found on the manufacturer's website or in the product’s packaging. Taxpayers should not attach this to their tax returns, but keep it on hand with your other tax records.
Energy Tax Credits Reduce Your Cost Basis
You must reduce the cost basis of your home by the dollar amount you claim for residential energy tax credits. You must reduce your basis by points the seller paid to you.
Its basis is the total amount it cost to complete construction if you had a hand in building a portion or the entirety of your home yourself.
As an example, let's say you bought your home for $250,000 and sold it for $300,000. Your cost basis would be $250,000, assuming you didn't make any other improvements that didn't result in claiming a residential energy tax credit. You would have a capital gain of $50,000—the difference between $300,000 and $250,000—and capital gains are taxable.
Now let's say that you claimed a $4,000 tax credit for your fuel cell at one point. Your gain increases to $54,000, or $300,000 less $246,000, because you must subtract this from your cost basis.
Frequently Asked Questions (FAQs)
How does the residential energy efficient property credit work?
The residential energy efficient property credit is designed to encourage consumers to make energy-efficient upgrades to their homes by offsetting some of the costs of those upgrades. A portion of the cost for alternative energy equipment and installation can be credited against your taxes when you file your annual return.
How do I claim a renewable energy tax credit?
Complete and file IRS Form 5695 with your tax return to claim either the residential energy efficient property credit or the nonbusiness energy property credit.