HomeLink Magazine Winter 2009: Tax Credit for Home Efficiencies

Are you Getting a Visit from the Tax Man or Santa Claus?

Tax Credits for Home Efficiencies

By Chad Feagler, Mountain Energy Consultants

Although the current recession has dropped energy prices significantly, prices are expected to return to record costs when the economy makes a turn for the better. Homeowners will deal with a significant increase in cost to space heat and cool their homes, heat water, run appliances, and light space. To offset these costs homeowners and builders will need to increase the energy efficiency of the existing structures and construct energy efficient new homes. Currently there are several tax rebates, incentives and credits on a federal, regional and local level for both new and existing homes to accomplish the task of decreasing the demand for energy for residential housing and keeping money in the homeowner's pocket. 

New Construction
For new residential construction, the largest tax credit is known as the builder's tax credit or the Energy Tax Credit for new homes. In 2005 congress passed, and the president signed into law, the 2005 Energy Policy Act. One provision in this act is the $2,000.00 builder's tax credit given to the contractor who constructs a home that is 50% more efficient in space heating than the 2004 International Energy Conservation Code. To show that the home performs to this level, it must be modeled using IRS-approved software and inspected, tested, and approved by a certified HERS (Home Energy Rating System) rater. Although such efficiency upgrades may seem easy to accomplish, they are actually rather difficult, especially in Colorado, where the majority of mountain homes are designed with an abundance of windows facing the direction with the best view instead being oriented for the most passive solar heat gain. For the home to qualify, it really comes down to the amount of insulation in the shell, the efficiency of heating equipment, the windows' performance, the number of windows and the direction they face. 

On a local level, the Colorado Governor's Energy Office is providing a $300.00 rebate to builders who construct new certified Energy Star homes in Routt County. An Energy Star certified home is 20% more efficient than a home built to code and must be inspected, tested, and approved by a certified HERS rater. In many green building programs such as LEED for homes and the City of Steamboat Springs Green Building Program, the home must be certified as Energy Star to meet the prerequisite in the energy portion of the program. 

Alternative Energy Systems
New homes may also qualify for a federal tax credit for the following alternative energy equipment: geothermal heat pumps, solar water heaters, photovoltaic and small wind energy systems. These systems will receive a credit of 30% of total cost (equipment and installation). For a home to qualify, the equipment must be installed prior to December 31, 2016 and have a manufacturer certification statement. A second residence will also qualify for the tax credit. 

Geothermal heat pumps are much like normal heat pumps but use the ground instead of the outside air to provide heat. Because they use the earth's heat they are among the most efficient heating/cooling technologies available. The efficiency of the geothermal heat pumps is measured in Co-efficient of Performance (COP). The higher the COP, the better the efficiency. For a closed loop system to receive the credit, the COP must be greater than 3.3; for an open loop system the COP must be greater than 3.6, and all Energy Star qualified heat pumps will qualify for 30% of the total cost credit. 


Solar water systems use water heated by the sun for space heating and domestic hot water. For the system to qualify for the 30% credit, at least half of the energy used by the qualifying property must come from the sun. The credit is not available for expenses for swimming pools or hot tubs, and the water must be used for the dwelling. The system must be certified by the Solar Rating and Certification Corporation. 

Photovoltaic systems convert solar energy directly into electricity. For the system to qualify for the 30% credit, it must be installed prior to December 31, 2016. Currently the local electrical co-op in Routt County Yampa Valley Electric does not offer any payback or incentives.

Existing Home Upgrades
Existing homes account for as much as 70% of our energy demand in regards to residential housing. Because of high energy load, several additional federal rebates are offered other than the alternative energy sources rebates (existing homes will qualify for the same tax credits and time line as the new homes regarding alternative energy sources). The federal tax rebate program offers rebates for the following components: insulation and air sealing, windows, doors, skylights, roofing, HVAC systems, water heaters and biomass. For a home to qualify for the tax credit, it must be the homeowner's primary residence and the upgrade must be installed prior to December 31, 2010. 

Homes that leak warm air to the outside are known as energy hogs by the energy conservation industry. To give homeowners an incentive to decrease the air infiltration of a home there is a 30% of cost credit for insulation upgrades and air sealing measures (not including installation/labor costs, and capped at $1,500.00). For the insulation to qualify, its primary purpose must be to insulate and must have a Manufacturer's Certification Statement to qualify. Products that air-seal can also qualify as long as they come with a Manufacturer's Certification Statement. These products include: weather stripping, closed cell foam spray, caulk, and flexible air barriers. Air sealing is the lowest hanging fruit in energy savings and is one of the most cost effective measures that can be taken in older homes. 

Installation of more efficient doors and windows also qualifies for a rebate. As of June 1, 2009, all windows and doors must have U-value of .30 or below and a Solar Heat Gain Coefficient of .30 or below to receive the 30% of cost credit, capped at $1,500.00. 

As heat rises through a home it typically exits through the roof. To increase the efficiency of the roof, homeowners can regain 30% of costs to replace existing metal or asphalt shingles with an Energy Star qualified metal or reflective asphalt shingle roof (materials only up to $1,500.00). 

Replacing your heating system and domestic hot water system with a more efficient unit can gain a home owner a 30% credit which includes the cost of installation and is capped at 30%. For a boiler or furnace system to qualify it must meet a specific performance. Natural gas and liquid propane furnaces must operate at 95% efficiency or better and natural gas and liquid propane boilers must be 90% efficiency or better. For water heaters the home owner can gain a 30% credit for the cost of the equipment plus the installation cost; however, like space heating the improvement is capped at $1,500.00. The efficiency criteria for water heaters is measured as an Energy Factor (EF). To receive the rebate, an EF of .82 is required for both natural gas and liquid propane heat sources. 

On a local level for existing homes using Atmos Gas, there are rebates on equipment as well as low cost energy audits. Atmos Gas offers a $200.00 rebate to replace your furnace with a 92 to a 93.9% efficient system and $300.00 to upgrade it to 94% and above. For homes that use hydronic heat, Atmos will give its customers a $150.00 rebate to replace the boiler with an 84% efficient unit and above. Home owners who ensure that the system is the proper size by a manual J heat load calculation will receive an additional $50.00. A manual J heat load calculation ensures that the unit is properly sized according the home insulation values and will eliminate short cycling of the system which increases utility bills and shortens the life of the system. Installing Energy Star programmable thermostats will add an additional $25 to your rebates. Replacing natural gas water heaters with a unit that has an Energy Factor of .62 and greater gives a $50.00 rebate and a $100.00 rebate for replacing the water heating unit with a tankless heater with an Energy Factor of .82. 

Several of the federal tax credits are set to expire on January 1, 2010. Many homeowners have taken advantage of capturing more than one credit. For example, homeowners who have increased the insulation in the attic space can use both the Insulate Colorado funds and the $1,500.00 offered through the federal program to offset the cost of the upgrade. Bi-partisan legislation has been introduced in the US Senate to extend the credits to December 31, 2012 and create a $5,000.00 tax credit for homes that use 50% less whole-house energy than the 2004 IECC (50 HERS index). Please contact Colorado Senators Bennet and Udall and urge them to support the extension of the federal credits.