Leveraging real estate ownership into deductions has long been an effective strategy for fending off the Internal Revenue Service. Now, if you're willing to make green improvements, your home can lighten your tax burden even more.
In an effort to reduce energy consumption and pollution, loads of tax credits are available for homeowners looking to limit waste and emissions--consider it a stick and tofu approach. They're the result of the 2005 Energy Policy Act, which became effective for the 2006 tax year.
The biggest projects carry the largest credits. A solar power system for creating electricity carries with it a 30% of cost tax credit up to $2,000. The same credit goes for solar-powered water heaters, so long as they're used for residential purposes. Trying to write off a pool or Jacuzzi system will get you in hot water.
"Solar water heaters in the right kind of climate are the most accepted technology," says Warren Karlenzig, chief strategy officer of SustainLane, a best practices consulting firm for state and local governments. "But they're not as effective if you live in a place which doesn't get a lot of sun."
For the ambitious green-thumbed builder, any energy cell system that has an efficiency rating of 30% and a capacity of at least .5 kilowatts receives a 30% cost credit, as well as an additional $1,000 for every kilowatt of power the system can produce.
Spread The Wealth
But new tax credits for home efficiency improvements aren't limited to large-scale enterprises. In fact, available credits exist for low-key projects that, in recent Aprils, have been out of bounds for tax breaks.
Substantial undertakings like building a driveway or adding a pool have been deductible for a long time, but in years past you couldn't save money for window, floor or roof improvements. Now, if the materials are Energy Star-certified and fall under the scope of the Energy Policy Act, you can recoup some costs.
The effect is twofold, according to the Environmental Protection Agency (EPA), which estimates that efficient materials can reduce energy costs by 30%. It may have been a mild winter in many parts of the country, but the average American still spent $1,900 on energy bills last year.
Where To Begin
Throwing yourself headfirst into green improvement by going after tax incentives will help your tax return, but it may not be the best place to start for maximizing your home's energy efficiency.
"Before you start thinking about using solar energy or any of the other high-tech options available," says Karlenzig, "the first thing is to do an inventory."
Most local utilities will perform one free. It highlights your home's trouble spots where the most energy is being wasted. For a couple hundred dollars, private companies improve the service through the use of thermal imaging to graphically map out on a micro level the points at which energy loss occurs.
The biggest perpetrators are almost always windows and doorways, improvements that in the past haven't been tax deductible but now carry credits if they improve energy efficiency.
Exterior windows and doors, including skylights, that meet Energy Star requirements have a 10% tax credit up to $200. This also goes for storm windows and doors. Roofing and insulation or sealing that meets efficiency requirements earns a 10% credit up to $500.
Going Green
The green building movement has legs in the high-end luxury market. Pharmaceuticals mogul Stewart Rahr has a geothermal cooling system in his $45 million home in the Hamptons, and former CIA Director R. James Woolsey has an expansive solar-powered energy system installed on the roof of his Maryland home.
But while the tax abatements are nice, the money saved in the long term and the ethical motivation to emit less are the primary motivations for green home improvement.
"It's all connected--you save money, you save energy," says Karen Schneider, an environmental protection specialist at the EPA. She points out that the average American home emitted 22,000 pounds of carbon last year. "Credits are paid for 2006 and 2007, but the payoff will be for the life of the product."
Mother Nature's Helper
If you're looking for the most consistent long-term green solution, the answer lies at your local nursery--trees.
Summer heat flows through the east and west of a North American house, and the EPA estimates that mature trees planed on eastern and western exposures can reduce temperature by almost 10 degrees in summer months. In some cities, like Sacramento, Calif., the local government gives trees away in order to reduce strain on the grid.
Now that's a green solution everyone can wrap arms around.
