Tax Credits, Anyone?

May 01, 2006
May/June 2006
A version of this article appears in the May/June 2006 issue of Home Energy Magazine.
Click here to read more articles about Auditing

        In 2005, Congress passed, and the president signed into law, the 2005 Energy Policy Act (EPAct). One provision of this act is a $2,000 per home business tax credit for builders who build energy-efficient homes. The homes must be sold in 2006 or 2007 and must use no more than 50% of the energy used by a home built to 2004 International Energy Conservation Code (IECC) standards. To show that the home will perform to this level, it must be modeled using IRS-approved software and then inspected, tested, and approved by a certified HERS rater.
        So how do you build a home 50% better than 2004 IECC? That’s an excellent question. But unfortunately, there is no single answer. The answer depends on where the home is being built, and on what energy-saving features the builder is willing to put into the home. Some energy-efficient builders may find they are already building homes that qualify for the tax credit. Others may find the goal daunting, but ultimately attainable. Still others will find that the investment required to attain the 50% goal greatly exceeds the credit.
        As the product manager for Architectural Energy Corporation’s REM/Rate home energy rating software, I talk to raters from all over the country. Many of those raters are using the REM/Rate software to determine if their builder clients qualify for the tax credit, and if not, what they will need to do to get there. I have talked with raters whose builders’ homes meet the 50% goal with little or no modification—custom and production builders in climates ranging
from Wisconsin to Arizona. I have also had discussions with raters who believe they can convince their clients to make the improvements necessary to obtain the tax credit. And of course, I’ve heard from those who feel there is no way their builders will make the design and construction changes needed.
        At the recent Residential Energy Services Network (RESNET) conference in San Antonio,Texas, I made a presentation titled “Can It Be Done? How to Meet the 50% Threshold for New Federal Energy-Efficient Homes Tax Credit.” In preparation, I did some analysis using the REM/Rate software. The point of the analysis was to demonstrate the relative impact that some energy-saving design improvements might have on typical energy-efficient homes being built today (see Table 1). These improvements are not mandatory and costs are not considered. Working with a rater and/or software, builders can determine which improvements make sense for them.
        Figure 1 shows how seven typical homes built across the country that meet the 2006 Energy Star standards compare to the 50% goal. Why are some Energy Star homes further away from meeting this goal than others? It’s because the 50% better than IECC goal covers only space heating and cooling, while Energy Star and HERS ratings cover all energy use in the home, including water heating, lighting, and appliances. So right out of the gate,you can see that it may be harder to attain the 50% goal in some climates than in others. Let’s check it out.
        In Figure 2, I’ve added a number of improvements to these homes. The improvements are added sequentially, and the results are cumulative. In other words, the bar labeled “Ducts inside” includes all the previous measures. The impact of any single improvement can be determined by comparing that bar to the one to its immediate left.
        The improvements, in sequential order, are as follows:
        • Increase the ceiling insulation to R-50.
        • Install a 96 annual fuel utilization efficiency (AFUE) furnace.
        • Install a 17-SEER air conditioner.
        • Reduce infiltration to 1 ACH50 and install exhaust-only mechanical ventilation so credit can be taken for the reduced infiltration rate.
        • Move all ducts inside conditioned space.
        As you might expect, the impact of these improvements depends on the climate and the starting efficiency. As you can see, putting a high-efficiency furnace in Climate Zone 1 (Miami) makes no sense at all. And putting a high-efficiency air conditioner in Climate Zone 7 (Duluth) also makes no sense. Surprisingly, adding the high-efficiency furnace in Charlotte has a greater impact than adding it in Duluth. This is because the starting points are different—an Energy Star Home in Charlotte has an 80- AFUE furnace, while the one in Duluth has a 90-AFUE furnace.
        The last two improvements warrant discussion. The 2004 IECC is the first model code to provide energy credit for homes with infiltration rates below 0.35 natural ACH. All previous codes had set this level as a floor below which no credit could be earned. To get credit for the tighter shell, the home must be tested and a mechanical ventilation system must be installed. As we all know, infiltration is one of the biggest drivers in the energy use of a home, so getting the shell tight and taking credit for it is very important. Duct leakage is another big energy hog. Moving the ducts inside the conditioned space greatly reduces, or even eliminates, duct leakage.
        There’s another reason why these last two improvements are important. Nearly all of the homes I’ve seen that qualify for the tax credit have these three things in common:
        • very tight shells (1–2 ACH50);
        • mechanical ventilation systems (to get credit for the tight shell); and
        • ducts inside conditioned space.
        This isn’t to say that homes can’t be built to meet the 50% goal without these features. But from what I’ve seen and heard, these features are common among homes that qualify for the tax credit today.
        In Figure 2, Miami, representing Climate Zone 1, does not meet the 50% goal. So how can we get Miami to the tax credit level? Figure 3 shows two improvements that enable us to do so: adding windows with a low solar heat gain coefficient and adding fluorescent lighting. Both of these improvements reduce the solar and internal gains in the home and significantly reduce the cooling load. Note, however, that these same measures have little or negative impact in the other climate zones.

Window Orientation

        The models I used in the analysis for my presentation at the RESNET conference had the worst possible orientation for most climates—50% of the window area faced west, 25% east, and 12.5% each north and south. After the presentation, several folks asked about this and wondered what the impact of using better orientation might be. Figure 4 shows the impact of rotating the homes 90° so that 50% of the window area faces south,25% faces north, and 12.5% each faces east and west. While the impact of this change is small, it is often a no-cost/low-cost improvement. Simply orienting standard homes so that most of the window area faces south will help builders meet the 50% goal. It should be noted that the windows in these models have no overhangs. Good passive design, including optimized solar control and window orientation,would further increase the savings relative to 2004 IECC.

A Tale of Two Homes

        A question I often hear is What HERS Index indicates that a home will meet the 50% goal? The answer:There isn’t one. Remember, only space heating and cooling are included in the tax credit analysis, while all energy is included in the HERS Index. This difference explains why the HERS Index is not a reliable indicator of tax credit status.
        To demonstrate this, I modeled the Indianapolis home with two different types of improvement—those that focus on space heating and cooling, and those that focus on water heating, lighting, and appliances. Figure 5 shows how different the HERS and tax credit results can be. With the improvements, both homes ended up with a HERS Index of 71,but only the home with the space-heating and - cooling improvements meets the 50% better than IECC goal. The home with the waterheating, lighting, and appliance improvements is nowhere near qualifying for the tax credit.
        Now this isn’t to say that a rater working in a particular geographical area, with a particular type of home and a list of typical improvements, couldn’t develop the “feel” for the HERS Index that is needed to meet the 50% goal. But nationally, it would be impossible to generalize.

Do You Qualify?

        Do your homes, or those of your clients, qualify for the tax credit by meeting the 50% better than IECC goal? The only way to tell for sure is to obtain and use IRS-approved software. Or better yet, contact a local HERS rater who is trained and certified to analyze, inspect, test, and ultimately qualify homes for the tax credit.
        Of course, anyone planning to take the 2005 EPAct tax credit should consult a qualified tax professional. The information in this article is not intended to be, and should not be construed as, tax advice.

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