As a homeowner, being energy efficient pays off a lot when it comes to reducing your monthly electric or gas bills. In addition, you are also helping the environment in reducing deadly emissions in the air so it does provide double benefit. However, purchasing these equipment may be too costly and the break-even point (the number of years to recoup your cost in terms of the money that you saved) may be a at least 10 years. Â Because of this, the IRS provided tax breaks to help alleviate the cost.
The residential credit is a non-refundable credit, meaning that if you do not owe any taxes, you cannot claim the credit. In addition, you can only claim the credit up to the amount of your tax liability and any excess may be carried forward in future years.
There are two types of residential energy credits that you can claim on your personal tax return and you can take both of them if you qualify. These are:
Non-business energy property credit
You can claim a credit of 30% of the costs paid or incurred in for any qualified energy efficiency improvements and any residential energy property but the credit is limited to only $1,500.An expense will qualify as an energy efficiency improvement if it is bought new or expected to remain in use for at least five years. Examples of these are exterior doors and windows, insulation material or system that are primarily designed to reduce heat loss or gain at home and any roof that are made up of metal or asphalt with appropriate pigmented coatings specifically and primarily designed to reduce heat gain of the home. Other examples are residential energy property such as heat pump water heaters, central air conditioner, natural gas heaters or furnaces, propane gas heaters or furnaces, water boilers, and stoves that used biomass fuel, etc.
Residential energy efficient property credit
You may be able to claim a credit of 30% of  the cost incurred to purchase qualified residential energy efficient property. Examples of these are solar electric property, solar heating property, fuel cell property, geothermal heat pump, and small wind energy property. However, the credit amount is limited to $500 for each one-half kilowatt of capacity of the the cost paid for qualified fuel cell property.
Tax Impact On Your Home
When you claim the credit, you must reduce the basis of your home by the amount of the credit allowed. For example, you bought your home for $150,000 and you claimed a residential credit of $1,500 for the year, the new basis of your home would be $148,500. So when you sell your home, your gain would be the sale proceeds less the $148,500 and less  any other selling cost.
How to Claim The Credit
You must complete Form 5695 and attach it to your Form 1040. The amount of the credit will be entered on Form 1040, line 52.
Source: IRS.gov Pub 17