IRS Clarifies What Qualifies for Home Owner Energy Tax Credit

The Internal Revenue Service has published new guidance on Internal Revenue Code Section 25C, which allows up to a $1,500 tax credit for home owners who install energy-efficient windows, insulation and other qualifying products. The tax credit is equal to 30% of the qualified energy efficiency expenses paid by the home owner, but it is limited to $1,500 for improvements made during 2009 and 2010.

Notice 2009-53 explains the requirements for home owners to claim the 25C credit and provides detailed technical information regarding what improvements can qualify. Home owners can claim the credit only for improvements made to an existing home. However, NAHB has learned from the IRS that tax credit-qualified improvements installed in an addition to an existing home also qualify for the 25C program.

The guidance should help clear up confusion about the recent expansion of the tax credit that Congress approved earlier this year as part of the American Recovery and Reinvestment Act of 2009.

Among the highlights:

• Tax credit eligible products must be reasonably expected to remain in use for at least five years. One method taxpayers can rely on to satisfy this requirement is to purchase products from a manufacturer who offers a warranty lasting at least two years at no additional cost.
• Not all Energy Star-rated products that are installed qualify for the tax credit. The Energy Star Web site includes a detailed listing of products that qualify for the Section 25C program.
• The credit excludes installation costs for building envelope components — such as insulation and windows. In order for the home owner to claim the credit, the remodeler must provide an itemized breakout of the cost of these installed products, minus any labor or installation charges.

Notice 2009-53 provides the technical information on installed products that qualify, divided into the following two classes:

• Eligible building envelope components:

• Insulation material or system
• Exterior window, skylight, door, storm window or storm door with a U factor of 0.3 or below
• Metal or asphalt roofs that resist heat gain

• Qualified energy products:

• Electric heat pump water heaters that yield an energy factor of at least 2.0 in the standard Department of Energy test procedure
• Electric heat pumps and central air conditioners that achieve the highest efficiency tier established by the Consortium for Energy Efficiency as of Jan. 1, 2009
• Natural gas, propane or oil water heaters with an energy factor of at least 0.82 or thermal efficiency of at least 90%
• Biomass burning stoves with a thermal efficiency rating of at least 75% as measured using a lower heating value
• Natural gas and propane furnaces that achieve an annual fuel utilization efficiency rate of not less than 95 (AFUE)
• Natural gas, propane or oil water boilers and oil furnaces that achieve an annual fuel utilization rate of not less than 90
• Advanced main air conditioning fans with annual electricity use of no more than 2% of the total annual energy use of the furnace

Unlike the products in the building envelope class, Section 25C does permit home owners to claim as part of the 30% tax credit the costs associated with installing items in the qualified energy property class — including qualified water heaters and boilers, furnaces, biomass stoves and air conditioning fans.

Taxpayers can generally rely on certification statements made by the manufacturer that the installed product qualifies for the Section 25C tax credit. Taxpayers should maintain records of certification statements after claiming the credit in case they are subject to future IRS review. The manufacturer’s certification should contain:

• Name and address of manufacturer
• Identification of the class of eligible building envelope component
• Make, model number and any other property identifiers
• A statement that the component is eligible for the credit (may include U factor, class of window or door, etc.)

Also of importance, Notice 2009-53 provides the set of transition rules for qualified products installed before June 1, 2009. For these installations, taxpayers can claim for tax credit purposes the installation of property that meets less stringent energy efficiency requirements.

In particular, taxpayers can claim the credit for installation of windows and skylights that meet Energy Star requirements, requirements listed under prior IRS Notice 2006-53 or manufacturers’ certifications for 25C made under IRS Notice 2006-53. For installations on or after June 1, 2009 the requirements listed in Notice 2009-53 and described above are binding.

Section 25D incentives

Some remodelers and new home builders are also using a related tax credit to help home owners install products that generate energy. Claimed by home owners and home buyers, the Section 25D credit is equal to 30% of expenditure costs.

Thanks to changes made in the economic stimulus legislation and unlike Section 25C requirements, the Section 25D credit is not subject to any cap.

Qualifying products include solar electric systems, geothermal heat pumps, fuel cells and wind products. In addition, installation costs can be included in the calculation of the credit. Tax credits can be claimed for installation in primary or second homes, except for fuel cell products, which must be installed in a principal residence for tax credit purposes.

NAHB has confirmed with the IRS that home builders can provide an itemized cost breakout of installed Section 25D qualified products to a home buyer for tax credit claims after the purchase of the home.

Home owners can claim both tax credits on IRS Form 5695.

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Updated: June 9, 2009