Residential Energy Efficient Property Tax Credit

What is Residential Energy Efficient Property (REEP) Credit ?

The Residential Energy Efficient Property Credit provides an incentive for taxpayers to purchase alternative energy products and equipment for their home. The non-commercial energy property tax credit applies to energy efficient upgrades and has been extended to 2023. You may be able to take an energy credit if you make a qualified purchase for your home by 2016. There are two types of energy credits for homeowners, a residential energy efficient property credit and a non-commercial energy property credit.

The federal government provides tax credits for homeowners to make energy-efficient home improvements. Homeowners can claim a federal tax credit for installing or repairing appliances designed to promote energy efficiency or make certain improvements in their homes. Geothermal, wind, solar and fuel cell technology are all eligible for residential energy efficient property loans. You may qualify for the Residential Energy Efficient Property Credit if you make energy-saving improvements to your home. This house does not need to be your main home, but the home must be located in the United States.

According to the U.S. Department of Energy, you can claim REEP credits for geothermal equipment, solar and wind in both your main residence and second home. But fuel-cell devices only qualify if installed in your main residence. The maximum tax credit for fuel cells is $1,000 for every kilowatt. The Residential Energy Credit isn't just cash on hand, you can claim this credit on your annual tax return and it reduces the federal taxes you pay as a homeowner. The credit has been extended several times. You are eligible to reduce the amount of your taxes if you make energy-efficient home improvements before January 1, 2024. It's especially important to take advantage of your home's energy-efficiency when you file this year.

A taxpayer can claim a credit of 30% of the eligible expenses for the system that the U.S. Serves a residential unit located in the State which is owned and used by the taxpayer as a residence. Expenses in respect of equipment are treated as incurred on completion of installation. If the installation is in a new home, the "Put in Service" date is the date of occupancy by the homeowner. Expenses include on-site preparation, basic system installation or assembly for connecting a system in the home and for piping or wiring for labor costs. The additional amount can be carried forward to the next taxable year, if the federal tax credit exceeds the tax liability.

Individuals can claim a tax credit for residential energy efficient property that was put into service before January 1, 2024, and installed on or in relation to a residential unit located in the United States that is used as a residence by the taxpayer (Code Section 25D). This credit applies to qualified solar water heating assets, solar power assets, qualified small wind power assets, qualified fuel cell assets, biomass fuel assets and geothermal heat pump assets. Co-operative and incorporated residents can claim the credit by splitting the cost of installing the equipment with other unit owners.

How Does Residential Energy Efficient Property Credit Work ?

Residential energy efficient property credit are designed to allow consumers to make energy-efficient upgrades to their homes by offsetting some of the cost of those upgrades. When you file an annual return, a portion of the cost of installation and alternative energy equipment may be credited against your taxes.

How to Qualify for Residential Energy Efficient Property Credit ?

If you install alternative energy equipment to ensure that your home is energy efficient, you can claim a residential energy efficient property credit, but there are specific, applicable percentages to qualify based on the conversion being made :
  • 30% for assets placed in service after December 31, 2016, but before January 1, 2020.
  • 26% for assets placed in service after December 31, 2019, but before January 1, 2023.
  • 22% for assets placed in service after December 31, 2022, but before January 1, 2024.
The tax credit you are eligible for is a percentage of the cost of the alternative energy equipment installed in the home, including the cost of installation. Solar electric equipment, solar hot water heaters, biomass fuel cell property and wind turbines are examples of equipment that is eligible for this tax credit. This Energy Tax Credit is non-refundable, so the IRS will not send you the difference in cash if your credit exceeds any taxes you pay on your return. However, the unused portion can be carried over to your next year's tax return, so you won't lose it.

The property must be located in the United States, but it must not be the taxpayer's principal residence unless the alternative energy equipment is a qualified fuel cell asset. In this case the equipment must be installed in your main residence. Homes under construction and existing homes are both eligible. You cannot claim a residential solar loan for your rental properties. To be eligible for the Residential Energy Tax Credit, you must live in that property for part of the year, only to use it as a rental while you are away.

What Type of Property is Eligible for Residential Energy Tax Credit ?

Alternative energy systems such as solar power, fuel cells, geothermal heat pump assets, small wind power and solar hot water may qualify for the credit. For this credit, you can rely on the manufacturer's certification in writing that a product qualifies for the credit.

How Much is Residential Energy Efficient Property Credit Worth ?

The Residential Energy Tax Credit can be up to 30% of your cost of the eligible property. You can include any labor costs for onsite preparation, basic installation or assembly of the property.

How Can You Benefit From the $35 Billion in Residential Energy Tax Credit ?

The IRS currently offers two residential tax credits, for homeowners investing in energy efficient improvements to their homes and in alternative energy sources. The REEP credit provides almost unlimited savings to taxpayers, while the non-commercial energy asset credit is subject to certain limits.

What Improvements Qualify for Residential Energy Property Credit for Homeowners ?

An individual can claim a credit for 10% of the cost of qualified energy efficiency improvements and the amount of residential energy property expenditures paid or expended by the taxpayer. Taxable year (subject to an overall credit limit of $500). Qualified assets must meet applicable standards in law.

Qualified energy efficiency improvements include the following :
  • Energy efficient exterior windows, doors and skylights
  • Roofing (asphalt and metal) and roofing products
  • Insulation
Residential energy asset expenditures include the following :
  • Energy efficient heating and air conditioning systems
  • Water heater (natural gas, oil or propane)
  • Biomass stove

Are there any Limits for Claiming Residential Energy Property Credit ?

REEP credit is limited to an overall lifetime credit limit of $500 ($200 lifetime limit for Windows). REEP credit is non-refundable. A nonrefundable tax credit allows taxpayers to reduce their tax liability to zero, but not below zero. There are also the following personal credit limits :
  • $50 for an upgraded main air circulating fan
  • $150 for a propane, qualified natural gas, oil furnace or hot water boiler
  • $300 for any item of energy-efficient building property

How to Claim for Residential Energy Efficient Property Credit ?

If you have improved the energy savings in your home by installing an earth-friendly energy source, you may be able to claim a REEP credit for a percentage of the total cost you paid. An individual taxpayer can claim REEP credit for eligible energy efficient assets. Established on, or in relation to, a residential unit located in the United States and used by the taxpayer as a residence and placed in service before January 1, 2024. Claim the REEP credit by filing Form 5695 with your tax return. Residential Energy Efficient Property Credit is calculated on Form 5695 and claimed on Form 1040.

Solar electric, solar water heating, small wind power, geothermal heat pumps and fuel cells must have these assets in service by December 31, 2023 in order to claim the credit. This means, not only can you claim the credit on your 2021 or previous year's tax return, you can also claim it through the reduced amount on your 2022-2023 federal income tax return.