Is the HERO Solar Financing Solution Really a Hero?

The Home Energy Renovation Opportunity (HERO) Plan is a program that finances the purchase and installation of eligible energy-efficient and water-saving upgrades in a taxpayer’s home. These upgrades include solar panels, air conditioning, roofing, windows, lighting controls, and landscape-related products.

The HERO program originated in Riverside County in Southern California, the purpose being to provide financing for high-cost energy-related improvements for a taxpayer’s home, such as solar panels, with principal and interest payments added to the taxpayer’s property tax bill for the year. The HERO program has since spread to almost all counties in CA, and even some areas outside of California. You can also find ads for this program popping up frequently on the Internet.

The fact that the loan payments are included with the property tax payments has led to considerable misunderstanding, with many real estate agents and others claiming the entire payment is tax deductible, which is not true. Although included in the tax bill, the HERO payments are separately stated and not deductible as property tax.

However, the portion of the HERO payment that represents interest is generally deductible as home mortgage interest. Although the interest portion is not spelled out on the property tax bill, the HERO program does supply each borrower with a loan amortization schedule that allows the homeowner to determine the amount of interest paid for the year and the amount that may be deductible.

Another issue is that the IRS requires lenders to issue Form 1098, which shows the amount of interest paid by the homeowner each year. The IRS uses that information to match the amount of interest deducted by the homeowner, and mismatches will result in an IRS inquiry. With the HERO program no 1098 is issued, and care must be taken with regard to how the interest is deducted on the tax return to avoid receiving a letter from the IRS. This problem has been so prevalent that the IRS Chief Counsel’s Office issued an advice letter, and most recently the California Franchise Tax Board offered guidance on the issue.

The HERO program has very liberal qualifications, with no money down, fixed rates and variable terms between 5 and 20 years. However, compared to today’s interest rates, those charged by the HERO program are quite high, generally in excess of 8%, and individuals should explore other avenues of financing first.

Although many of these energy-related improvements will qualify for tax credits, these credits are not refundable, which means they will only reduce your tax liability to zero, and the excess can be carried forward to future years as long as the credit is still in existence. The most substantial federal credit available is the popular solar credit of 30% of the cost of a solar installation, with no cap on the credit.

Example: If you install a $25,000 solar system on your home, the federal credit would be $7,500. However, if your tax liability for the year is only $1,500, you will only be able to use $1,500 of the credit, and the balance carries forward to a future a year.

The solar credit percentage remains at 30% through 2019, and then gets lower each year until the credit ends in 2021.

If you are considering making energy-related home improvements and would like to discuss the tax benefits and your financing options, please give this office a call.

Solar Tax Credits – Before You Take the Leap

When you see those TV ads for home solar power, you may get the impression that Uncle Sam is going to pick up 30% of your cost and you only have to come up with the other 70%. That is not necessarily the whole picture. True, the federal government has a 30% tax credit for the cost of a qualified solar installation (some states also have solar credits or other incentives). However, the federal credit is non-refundable and can only be used to offset your current tax liability, and any excess carries over to future years as long as the credit still applies in future years. Currently, the credit is allowed through 2021. What this means: You may not get all the credit in the first year as you might have been led to believe or assumed based upon the TV ads.

For example, suppose your solar installation costs $25,000. That would qualify you for a solar tax credit of $7,500. But suppose the income tax on your tax return is only $4,000. Then, the credit would reduce your tax liability to zero, and the other $3,500 ($7,500 – $4,000) of the credit is carried over to the next year’s tax return, where the credit will be limited to that year’s tax amount. If your tax is again less than the amount of the credit, the excess credit carries to the following year, and so on, until the credit is used up or the credit expires.

To qualify for the credit, the equipment must be installed in a home that is located in the U.S. and that you use as your residence. The credit can’t be claimed for equipment that is used to heat a swimming pool or hot tub. If the equipment is used more than 20% for business purposes, only the expenses allocable to non-business use qualify for the credit.

The credit covers both the cost of the hardware and the expenses of installing it, such as labor costs for on-site preparation, assembly, and installation of the equipment and for piping or wiring to connect it to your home. You claim the credit in the year in which the installation is completed. If you install the equipment in a newly constructed or reconstructed home, you claim the credit for the year when you move in. The credit can be taken for a newly constructed home if the costs of the solar power system can be separated from the home’s other construction costs and the required certification documents are available.

Solar installation companies offer a variety of ways to pay for their systems other than cash. You could take out a loan, and if that loan were secured by your home, generally you would be able to deduct the interest on the loan. Another option is to lease the system, in which case you would not qualify for the 30% solar credit and the lease payments would not be deductible. In addition, for the lease option, you would have to deal with transferring the lease to the new owner should you decide to sell the home or arrange to pay it off.

Another option available in some communities is loans financed by local government and loan payments tacked onto the property tax bill. Generally, this option is at very high interest rates, and you should consider other payment methods first. Just because the payments are added to your property tax bill does not mean the payments are deductible as property tax. Only the interest portion of the separately stated amount is deductible as home mortgage interest.

If you would like to review your options in more detail, including the tax benefits and other aspects of purchasing a solar system for your home, please give this office a call.

Homeowner Energy Tax Credits Get New Life

Recently passed legislation has given new life to two homeowner energy credits that had expired or were about to expire, providing renewed opportunities to homeowners wanting to take advantage of these credits and reduce their energy costs.

Non-business Energy Credit—The first of the two credits is what the tax code refers to as the Non-business Energy Credit. A more descriptive title would be an energy saving credit since it applies to improvements to the taxpayer’s existing primary home to make it more energy efficient. This credit was extended for two more years, allowing homeowners to claim the credit for qualifying energy improvements made in 2015 and 2016.

The credit generally applies to insulation, storm windows and doors, and certain types of energy-efficient roofing materials, air-conditioning and hot water systems.

The credit is 10% of the cost of the energy-saving items but does not apply to the cost of installation and is limited to a lifetime maximum of $500. So if you have taken advantage of this credit in the past and received $500 or more in credit in a prior year, you cannot claim any additional credit.

In addition to the $500 overall limitation, there are also per-item limitations on the credit; for example, qualified windows and skylights—$200, qualified hot water boiler—$150 and qualified energy-efficient equipment—$300.

The credit is nonrefundable and can only be used to offset income taxes (including the alternative minimum tax).

Residential Energy Efficient Property Credit—The second credit to be extended is called the Residential Energy Efficient Property Credit. Better known as the home solar credit, it also provides credit for wind energy systems, geothermal systems and fuel cell systems.

The credit is generally 30% of the qualified property and installation costs, subject to some limitations for fuel cell and geothermal systems.

The credit, which was scheduled to expire after 2016, has been extended through 2021, but only for solar electric and solar hot water systems (excluding swimming pools). In addition, the credit percentage is phased out beginning after 2019. The following are the credit percentages allowed through 2021:

  • 2009 through 2021: No annual limit
  • 2009–2019: 30%
  • 2020: rate reduced to 26% and only on solar-related systems
  • 2021: rate reduced to 22% and only on solar-related systems

There is no limit on the actual credit other than the credit percentage. It is a nonrefundable credit and can be used to offset income tax liability (including the AMT). However, if the credit is unused because it exceeds the income tax amount, it can be carried over to another year as long as the credit has not expired.

Things to Consider—When considering whether or not to go to the expense of installing a solar system, you need to consider a number of issues:

  1. Is it cost effective considering your electric usage?
  2. How will you pay for it?
  3. If you finance it are the terms and interest rate reasonable for your financial situation?
  4. How will it affect your property’s value?
  5. Will you be able to benefit from the tax credits?

Installing solar is a big financial commitment and should be considered carefully. Don’t let a solar system salesperson rush you into a decision. If you need assistance analyzing the financial and tax aspects of installing a solar system, please give this office a call before you sign on the dotted line.