Solar energy has many benefits to offer a housing industry that is more invested in sustainability and cost savings for homeowners. Many states have prioritized solar energy and offered a number of incentives for homeowners who choose to install solar panels, with rebates and other incentives allowing what was once out of reach financially for people to be an option.
Solar tax credits are one incentive that has taken center stage in the consideration of sustainable energy. Because of the massive cost savings solar can provide in regard to homeowners’ energy use, along with the reduced cost of solar panel installation these tax credits offer, housing can be made more affordable overall.
What Are Solar Tax Credits?
During the Summer of 2022, the Inflation Reduction Act was signed into law, ushering in a litany of cost-saving measures for citizens and businesses, including energy costs. The Solar Tax Credit provision of the Inflation Reduction Act allows for a 30% reduction in solar costs utilizing a tax credit — an expansion of a previous tax credit that allowed for a 26% reduction in solar costs.
Furthermore, there are bonuses for certain types of solar projects that can generate tax credits of up to 70% of the project cost. There are several aspects of solar energy that qualify under the Solar Tax Credit, including the solar panels themselves, the equipment necessary to get panels up and running, and labor and inspection costs.
Prior to the tax credits going into effect, the cost of installing solar panels on a home could be considerable, averaging between $10,000 to $15,000 for an average-sized 2,000-square-foot home. And while the cost of solar energy for alternative home options such as tiny homes is far lower, solar energy could still be out of reach for many in a housing market that is becoming more and more unaffordable with each passing year.
The expanded solar tax credit applies to new solar installs as well as those installed on or before Dec. 31, 2019, giving those who jumped on the solar opportunity prior to the Inflation Reduction Act a chance to save. While the tax credit will decrease to 26% for 2033 and to 22% for those installed in 2034, this tax credit expiration date does not occur until 2035, at which time Congress could choose to renew it. This far-reaching credit gives many homeowners plenty of time to choose solar as an energy option and save hundreds to thousands of dollars a year on the cost of owning a home.
In order to qualify for the new solar tax credits, the panels must have been installed between Jan. 1, 2017, and Dec. 31, 2034, for a residence owned by the one claiming the credit in the United States. However, those who hold an interest in an off-site community solar project may also qualify for the credit. In addition, the solar installation has to be new — not a repair of an old installation.
The expanded Solar Tax Credit that is part of the Inflation Reduction Act is not the only solar tax credit available to homeowners, though it is one of the most generous and the one currently making headlines amid widespread unaffordable housing issues. The Investment Tax Credit allows homeowners to deduct part of the cost of their solar panel installation from their taxes, but expires on Dec. 31, 2023, as this credit was part of the older incentive predating the Inflation Reduction Act.
Additionally, many states offer their own state tax credits for solar installs that work in tandem with the federal-level credit. Some states also offer a reduction in property taxes for houses with solar installs. Moreover, there are several ways where “going solar” can help make home ownership more affordable and help reduce the carbon footprint of homeowners at the same time.
Making Housing More Affordable
Affordable housing is an issue that has been making headlines, even before the pandemic and seeping inflation wreaked havoc on the housing market. According to studies, 30% of all households had what was deemed “unaffordable” mortgages or rent payments in 2020, which was defined as payments exceeding 30% of the overall household income — a time-tested standard for affordability. The same studies showed that one in seven households paid over half their income in housing costs, an untenable situation for most.
Housing shortages are largely driving the underlying problem of unaffordability, and this has led people to devise alternative housing options such as microunits and co-housing, manufactured homes, and tiny home communities. But with new solar tax credits open to investors, as well as private homeowners, it may be the incentive they need to consider building lower-cost, sustainable housing units and communities — all powered by solar.
Making our homes more energy efficient makes home ownership more affordable overall, regardless of what kind of home one chooses to live in. The Inflation Reduction Act aims to lessen the cost burden of everyday life on the average American, and the solar tax credit provision of the Act provides a way to spur advancements in sustainable, energy-efficient living to bring affordable home ownership options back to the market.
Justin Draplin is CEO of Eclipse Cottages, a Travelers Rest, South Carolina-based sustainable home technology company focused on energy efficiency.