Can Sustainable Homes Offer Tax Breaks?

June 01, 2017 : Eli Colmenero

Winter is starting to feel a little warmer and shorter and all-too-common cases of environmental contamination are reported. Thankfully people taking notice  — and action — reducing their environmental footprint. And, here’s an additional benefit: reducing your carbon footprint by investing in sustainable homes may offer some tax breaks.

Residential Energy Efficient Property Credit

The Residential Energy Efficient Property (“REEP”) tax credit for 30% of the cost of your sustainable home (qualifying property). A tax credit is a dollar-for-dollar reduction in your tax liability. So, for every dollar spent on qualifying property, you could get $0.30 knocked off your tax bill.

Thus, you can take a credit for the first $1,665 of qualifying property. However, REEP can’t reduce your tax liability of more than $500. REEP is a non-refundable tax credit, and therefore may not give a taxpayer a larger tax refund. Additionally, you can carry over unused REEP tax credits into to future years.

[The REEP credit can be claimed on Form 5695: Residential Energy Credits.]

Here are types of properties that qualify for the REEP:

  • Solar Water Heating Property: At least half of the energy used by the heater is derived from the sun and is certified by an entity that is endorsed by the state government where the property is installed.
  • Solar Electric Property: Solar panels purchased or financed through a seller will permit the taxpayer to retain ownership of the property after the end of the term may qualify for REEP credit. Unfortunately, people who lease solar panels may not claim a REEP credit.
  • Fuel Cell Property: These systems use hydrogen or natural gas to produce emission-free electricity.
  • Small Wind Energy Property: This property uses a wind turbine to generate electricity.
  • Geothermal Heat Pump Property: The property must use the ground or ground water as an energy source to heat a home. Property also qualifies if it uses the ground or ground water as a thermal sink to cool a home. This is the only property that must meet the Energy Star program requirements in effect at the time the client purchases the property.

In the above instances, the property must be installed in a dwelling with a kitchen, sleeping quarters, and a bathroom. Additionally, you must use the dwelling unit as a residence; so the REEP credit is not available for rental homes.

You also must carry a manufacturer’s certification that maintains the property meets the requirements to claim the credit. This should not be confused with a reseller’s authorization—the certification should come from the manufacturer through the product’s packaging or from the manufacturer’s website. The taxpayer is not required to attach the statement to the return but should save it with their tax records.

On January 1, 2017, another credit for sustainable improvements made to a home expired. The Nonbusiness Energy Property Credit, claimed on Form 5695, covered only certain expenditures made in 2016 that increased the energy efficiency of a primary residence. This provision was extended for two years by the PATH Act. So, even if your sustainable improvements don’t qualify under the REEP credit, they may qualify under this credit if they were made in a previous year, or if Congress extends the Nonbusiness Energy Property Credit.

If you have made some steps to reduce the environmental footprint of your home, consider visiting your nearest H&R Block location to see if you qualify for some tax savings for your sustainable home!

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Eli Colmenero

Eli Colmenero

The Tax Institute, H&R Block

Eli is a tax research analyst specializing in real property as well as oil, gas and natural resources. He attends the University of Missouri-Kansas City School of Law.