New Tax Incentive for Building Energy Efficient Homes

by Candice Pfluger

Home builders have a new incentive to build energy-efficient homes. Under a provision in the soon to be enacted Energy Act, eligible contractors can qualify for a new tax credit of $2,000 per home when they construct qualified new energy-efficient homes. Here is an overview of the new credit.

Credit requirements - For a structure to qualify for the credit:

  • It must be located in the U.S.;
  • Its construction (which includes substantial reconstruction and rehabilitation) must be substantially completed after the Act's enactment date and it must be acquired in 2006 or 2007;
  • It must meet specific energy saving requirements explained below;
  • It must be built by the "eligible contractor" (the person who constructed the home); and
  • It must be acquired by a person from the eligible contractor for use as a residence during the tax year.

When $2,000 credit applies - A home qualifies for the $2,000 credit if:

  • It is certified in accordance with guidance to be issued by IRS to have a projected level of annual heating and cooling energy consumption that meets the standards for a 50% reduction in usage, compared to a comparable dwelling built in accordance with the standards of chapter 4 of the 2003 International Energy Conservation Code as in effect (including supplements) on the date of the Act's enactment, and the Federal minimum efficiency standards specified in Code Sec. 45L(c)(1)(A)(ii); and
  • Its building envelope component improvements account for at least one-fifth of the 50% reduction.

What is the "building envelope"? This includes insulation materials or systems specifically and primarily designed to reduce heat loss or gain, exterior windows (including skylights), doors, and any duct sealing and infiltration reduction measures.

Other rules - The new credit is part of the general business credit. No credits attributable to energy efficient homes can be carried back to any tax year ending on or before the effective date of the credit. There's a basis reduction in the property for the amount of credit claimed.

The construction group at Clothier & Head hope’s this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to call 206-622-1326.