Property tax exemption

The federal tax credit for energy-efficient home improvements was established by the Energy Policy Act of 2005. After expiring December 31, 2007, the credit was extended and expanded by The Energy Improvement and Extension Act of 2008 (H.R. 1424: Div. B, Sec. 302) and The American Recovery and Reinvestment Act of 2009 (H.R. 1: Div. B, Sec. 1121). The credit now applies to eligible equipment purchased between January 1, 2009, and December 31, 2010. In addition to extending the credit, H.R. 1424 and H.R. 1 strengthened the efficiency requirements for most equipment, extended the credit to stoves that use biomass fuel and asphalt roofs with appropriate cooling granules; raised the cap for the credit; and redesigned the way the credit is calculated.

The credit applies to energy efficiency improvements in the building envelope of existing homes and for the purchase of high-efficiency heating, cooling and water-heating equipment. Efficiency improvements or equipment must serve a dwelling in the United States that is owned and used by the taxpayer as a primary residence. The maximum amount of homeowner credit for all improvements combined is $1,500 for equipment purchased during the two-year period of 2009 and 2010.

Building Envelope Improvements
Owners of existing homes receive a tax credit worth 30% of the cost of upgrading the efficiency of the building's envelope. Installation (labor) costs are not included. The following improvements are eligible for the tax credit:

Insulation materials and systems designed to reduce a home's heat loss or gain
Exterior doors and windows (including skylights) and
Pigmented metal roofs designed to reduce heat gain, and asphalt roofs with appropriate cooling granules.

Heating, Cooling and Water-Heating Equipment
Taxpayers who purchase qualified residential energy-efficient property are eligible for a tax credit worth 30% of the system cost, including labor costs. The credit may also be applied to labor costs for assembly and original installation of eligible property. The following types of equipment are eligible:

Electric heat pump water heaters
Electric heat pumps
Central air conditioners
Natural gas, propane or oil water heaters
Natural gas, propane or oil furnace or hot water boilers
Advanced main air circulating fans
Biomass stoves that use "plant-derived fuel available on a renewable or recurring basis, including agricultural crops and trees, wood and wood waste and residues (including wood pellets), plants (including aquatic plants), grasses, residues, and fibers"

Performance and quality standards for tax credit eligibility vary by technology. (See 26 USC § 25C, H.R. 1424 of 2008 and H.R. 1 of 2009) for details. Additionally, the Energy Star web site offers detailed information on qualifying products, and IRS Notice 2009-53 provides more details.

Significantly, The American Recovery and Reinvestment Act of 2009 repealed a previous limitation on the use of the credit for eligible projects also supported by "subsidized energy financing." For projects placed in service after December 31, 2008, this limitation no longer applies. Businesses that receive other incentives are advised to consult with a tax professional regarding how to calculate this federal tax credit.

Background
The Energy Policy Act of 2005 established the tax credit for energy improvements to existing homes. The credit was originally limited to purchases made in 2006 and 2007, with an aggregate cap of $500 for all qualifying purchases made in these two years combined. There were also separate individual caps for the different equipment types. H.R. 1424 of 2008 reinstated the credit for 2009 purchases and made other minor adjustments. H.R. 1 further extended the credit to include purchases made in 2010 and replaced the $500 aggregate cap with a $1,500 aggregate cap for installations made in 2009 and 2010. Tax credits for installations made in 2006 and 2007 are still limited to $500. Any purchase made in 2008 is not eligible for this tax credit.

Geothermal heat pumps were originally eligible for this credit, with a $300 cap. However, geothermal heat pumps are now eligible for the residential renewable energy tax credit, with no cap.