Energy-conscious home owners, buyers and builders around the country could be in line for major new tax incentives from Capitol Hill. The omnibus federal energy bill passed by the House August 2nd before heading home for summer recess contains several tax credit provisions aimed squarely at residential real estate.

Tops on the housing-related list in the massive, 511-page bill (H.R. 4) are new federal tax credit programs for home owners who install new insulation, energy-efficient windows, doors, solar hot water and photovoltaic equipment. Home builders and contractors also can qualify for new tax credits when they install energy-efficient heating and cooling systems in the houses they construct.

For owners of existing homes the credit will be 20 percent of the amounts they spend on "qualified energy efficiency improvements", up to a maximum credit of $2,000. Tax credits are more valuable to taxpayers than deductions because they are subtracted dollar-for-dollar off the bottom line of your federal tax bill.

The new insulation, weatherstripping, windows, doorways and other improvements will need to be installed on properties located in the United States that are used as the taxpayer's "principal residence," as defined by the tax code. The credits will not be available, in other words, on energy improvements to your second home, rental properties, or your overseas island retreat.

To qualify for the credits, the energy-conserving components you install will need to be "reasonably expected" to remain in use for at least five years and to be of "original use" by you.

When the total expenditure on conservation improvements by a taxpayer exceeds $1,000, the components will need to carry energy-efficiency ratings -- typically labels on the products attested to by the manufacturers -- or will need to be certified by a utility company or a state home energy rating organization.The new federal credits won't be for just any home improvement you can link to energy conservation, in other words: The stuff you install will need to be demonstrably effective in lowering fuel consumption.

Should you not need to use your full credit in any given tax year, the House bill allows you to roll the unused portion over into a future tax year. Condominium owners whose management associations do large energy retrofits can qualify for the credits based on their pro-rata ownership share of the property.

The solar and photovoltaic energy-production equipment tax credits are similar to the credits for conservation: The components you install have to be certified or rated, either by label or through inspection. The maximum credit available is $2,000 during a tax year.

Home builders and contractors also get a shot at tax relief under the new energy bill. When they install energy-efficient heating and cooling systems in a new home they're constructing, they may be able to qualify for up to a $2,000 credit per home, beginning next January 1. The systems will need to pass energy-rating or local certification muster.

The new federal tax credits are expected to be extremely popular. The congressional Joint Committee on Taxation estimates that the home improvement incentives alone will lead to $1.6 billion worth of tax credits to homeowners in the coming decade. The solar and photovoltaic credits are estimated to put $125 million back into home owners' pockets during the same period.

The House-passed bill was strongly endorsed by the Bush administration, and supported by some moderate Democrats. But because it is loaded with controversial provisions regarding oil drilling in the Alaska National Wildlife Reserve and provides huge new incentives to oil and gas producers, the bill's fate in the Democratic-controlled Senate is difficult to predict.

Happily for homeowners and builders, though, the real estate tax credit provisions are supported by Republicans and Democrats in both houses. If the House bill makes it through the Senate this Fall, the real estate credits are virtually certain to be retained.

For more articles by Ken Harney, please press here.

Published: August 6, 2001

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.