Don't Mess With Taxes

State programs complement federal tax breaks for energy-saving commercial and residential property improvements.

These pups probably would be cooler inside under the A/C instead of atop the condenser. As a general rule, your cooling system works better when you keep the outside air conditioning unit clear of everything, including pets!

My phone's battery is being drained by the summer heat. No, not because I'm using it outdoors. I rarely leave my climate-controlled haven.

It's being sucked of power because I'm getting an inordinate number of alerts about how freakin' hot it is in my part of Texas, as well as places across the country where I have family and friends.

Not to jinx myself, but earlier this year we replaced an aging air conditioning unit. I hated spending the cash, but am happy now. The house is comfortable. Our electric bill, which is higher recently because of the string of triple digit temperatures, is still less than it was this time last year. And I get to take advantage of the federal tax credit that was part of the Inflation Reduction Act of 2022.

That new law revamped various energy-efficient home improvement credits for certain products installed from Jan. 1, 2023, through Dec. 31, 2032. Among them is qualifying central air conditioners.

In this case, the tax credit is 30 percent of the cost, up to a $600 maximum credit. Sure, $600 is not a lot compared to the new unit's total price. But I'll take any amount back. And since it's a tax credit, it will offset any tax we owe dollar-for-dollar.

If you qualify, file Internal Revenue Service Form 5695, Residential Energy Credits, with your annual tax return to claim the credit. You can read more about this process in my post Use federal home energy tax credits to fight the heat, from back in June when it wasn't even that hot, relatively speaking.

State, local help moving a-PACE: However, Uncle Sam isn't the only branch of government that can help people beat the heat.

Property Assessed Clean Energy financing, known as PACE, is a nationwide loan program that enables low-cost, long-term funding for energy efficiency, renewable energy, and water conservation projects.

PACE financing is repaid as an assessment on the property's regular tax bill, and is processed the same way as other local public benefit assessments (sidewalks, sewers) have been for decades.

Mostly commercial, but making residential inroads: PACE-enabling legislation is active in 38 states and the District of Columbia. Depending on local legislation, PACE now can be used for commercial, nonprofit, and residential properties.

It began originally as a business program, but is expanding, albeit slowly, to the residential sector. Typical home improvement projects covered by PACE loans include replacing broken or failing heating and cooling systems and hot water heaters; upgrading air sealing and insulation; installing Energy Star doors, windows, roofing, and appliances; converting to solar photovoltaic systems; and employing water conservation and resiliency measures, such as seismic retrofits and wind hazard protection.

Currently, residential PACE is available only in California, Florida, and Missouri.

PACENation, an association that follows and advocates for the programs, has an online interactive map (that's a non-interactive screenshot below) that tracks where all programs, both residential and commercial, are available. Check it out to see what's available in your area.

As of 2019, more than 200,000 homeowners have made $5 billion in energy efficiency and other improvements to their residences through PACE financing, according to the latest data available at the U.S. Department of Energy's Office of Office of State and Community Energy Programs (SCEP). Yeah, DoE needs to pick up its statistics collecting pace on PACE.

Unfortunately, those statistics come from the limited, three-state residential PACE pool noted earlier.

Still, it's a start. If you live in California, Florida, or Missouri, check out the options.

Energy loan repayment and tax issues: Where residential PACE loans are available, qualified applicants can receive 100 percent financing and the property tax payback term can be as long as 20 years.

And rather than a loan you must pay each month, the repayment typically is made as an addition to your property tax bill.

That definitely can help with month-to-month cash flow.

Note, however, that since PACE loans are part of your property tax bill, you need to make sure you can cover the new, higher assessments. If you can't, you could eventually face a tax lien and/or foreclosure.

On the good tax side, however, is that up to $10,000 of your property, as well as other state and local, taxes are still tax deductible on your federal tax return if you itemize.

If PACE's direct tie to your property tax concerns you, you could consider refinancing your home loan and taking out extra money to make the energy system upgrades.

Interest on this type of refi money, secured by your home and used in connection with the residence, is still in most instances tax deductible under the Tax Cuts and Jobs Act.

As in all things tax, carefully evaluate your personal circumstances and consult your tax advisor as to how any move might affect, for better or worse, your eventual actual tax liability.

Loan tied to property, not the owner: Another factor unique to PACE loans is that they are attached to the property rather than an individual.

That means the repayment obligation may transfer when a property is sold if the buyer and new mortgage holder agree to assume the PACE obligation.

This special loan set-up alleviates a key concern of homeowners who are hesitant to make major energy improvements because they worry that they may not stay in their houses long enough to get enough energy savings to cover their upfront costs.

Home sale hindrance or benefit: OK. I'm feeling even through the interwebz some hesitancy here. I get it. I'm a homeowner, too, and I eventually plan to sell my house so I know what my fellow property owners and potential buyers are thinking.

Won't this added cost undercut my sale plans?

As in most things, be they real estate or taxes or life, it depends.

Sure, some buyers won't want any added expenses. Others might, however, see the PACE payback as negligible as long as the systems the loan financed keep their newly-assumed utility costs low.

Other DSIRE-able energy tax breaks: In addition to PACE, many state and local governments offer other incentives for renewable energy and energy efficiency.

DSIRE, or the Database of State Incentives for Renewables and Efficiency, is a comprehensive source of information on such programs. Established in 1995, DSIRE is operated by the N.C. Clean Energy Technology Center at North Carolina State University.

DSIRE also has an interactive map where you can find programs, ranging from rebates to loans to tax breaks, for both businesses and individuals in your state.

You also might find these items of interest:

• Save some tax green by going greener at home
• Heat pumps get special tax break in Inflation Reduction Act
• 2 federal projects announced to improve EV charging options

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