Does Solar Power Make Sense for Property Owners?

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Does Solar Power Make Sense for Property Owners?
by Annette West, CCIM, MBA, CPA

The recent Energy Policy Act of 2005, signed right here in New Mexico at Sandia National Laboratories on August 9, gives tax credits to consumers and tax deductions to businesses who make energy conservation improvements. (It also gives credits for buying hybrid gas/electric cars, but with a catch, as we will discuss later.) Remember-a tax credit reduces your income tax bill dollar for dollar, as opposed to a tax deduction, which reduces taxable income and thus to a lesser extent your tax bill.

In order for understand the tax credits and deductions, an explanation of solar energy terminology is useful. Homeowners can get tax credits on two different types of systems: photovoltaic systems and thermal systems.

A photovoltaic system creates electricity that you can use for lighting, and commonly consists of solar panels.

A thermal system heats water pumped through pipes on your roof and stores this water in an insulated tank. The hot water can then be used not only for bathing and dish and clothes washing but also for radiant heat and to heat your swimming pool. (Note: systems heating swimming pool and hot tubs exclusively are not eligible for tax credits.)

Since we have lots of sunshine in Las Cruces, I thought it would be fun to calculate the cost and savings of a photovoltaic system for a 1300 square foot house. (If you would like to do this for your house, I recommend going to http://www.altenergystore.com/.)

The first step is to determine how much energy you use by adding the watts of power consumed by your appliances. I quickly learned that I could save myself the cost of a solar panel if I dry my clothes outside. An electric dryer uses a whopping 4,000 watts per hour, as opposed to a typical refrigerator which uses 475 watts per hour. Our 2 person no children (but computer intensive) household uses approximately 1,680 watt-hours per day.

The second step is to divide the watts used per day by the lowest number of sunshine hours per day predicted for your city, or the closest city in their system. The resulting number gives you the total watts your solar panels will need to generate; in my case, 3500 watts.

The last step is to look at the solar panels available and determine how many panels you need based on their watt output. I would need to buy 21 panels that generate 170 watts per panel for a cost of $17,427.

How much would this save me? The National Renewable Energy Laboratory offers a calculator called PVWATTS at http://rredc.nrel.gov/solar/codes_algs/PVWATTS/version1/  that computes energy savings by city and state.

I would save an estimated $585.08 per year by installing the $17,427 system.

But wait-I get a tax credit. The federal tax credit applies for systems installed in 2006 and 2007, and gives you back 30 cents on every dollar you spend up to a total credit of $2,000 for a photovoltaic system. This reduces my cost to $17,427 less $2,000 or $15,427; the system would pay for itself in 28 years.

When you consider that the average homeowner moves every 5 years or less, installing a system with a 28 year payback does not make much economic sense. Even with the federal tax credit, solar energy does not seem cost effective. Until New Mexico offers state energy tax credits to homeowners, the 30% off sale may be one sale you want to miss.

(Note: New Mexico does offer a Renewable Energy Production Tax Credit of one cent per kilowatt-hour for companies that generate electricity from wind, solar, or biomass.)

However, other breaks in the tax bill are worth noting. If you make energy saving improvements in the next two years, you could get back as much as $500, the maximum tax credit for all improvements during the two year period. Improvements include:

* Added insulation: 10% of cost up to $500

* Replacement windows: 10% of cost up to $200

* Furnaces and boilers: $150 for qualifying units

* Central air conditioning units: $300 for qualifying units

* Fans for heating and cooling systems: $50 for qualifying units

* Water heaters: $300 for qualifying units

For more details, see http://www.energystar.gov/index.cfm?c=products.pr_tax_credits

One last note on buying a hybrid car: if you have plans to do so, buy the car on or after January 1, 2006 and consider moving quickly. The energy bill offers the full credit on the first 60,000 hybrid cars offered by the manufacturer and for cars sold in the next calendar quarter following the quarter in which the 60,000th vehicle. The tax credit shrinks to 50%, then 25%, and then to zero for cars sold in subsequent quarters.

Please note that this article is NOT intended to provide tax advice but instead to alert you to topics you may want to discuss with your CPA, especially if you have plans to improve the energy efficiency of your home or buy a new car.

About the Author
Annette West, CCIM, MBA, CPA, is a Las Cruces Commercial REALTOR® and can be reached at AWest@AnnetteWest.com, http://www.annettewest.com/ or at 505-644-1634. She is a contributing writer for Landlord2Landlord.

As always, information in this article is not intended to be used, and should not be used, as legal, tax or accounting advice. Investors should seek advice from an independent financial advisor about their specific situation

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