What the Inflation Reduction Act Means for Homeowners

Homeowners who have recently made—or are interested in making—energy-efficient improvements to their home are currently basking in the best news ever.

On Aug. 7, the Senate approved the Inflation Reduction Act. It includes about $900 billion in spending and tax cuts, with $369 billion to fight climate change and fund green energy projects, including home upgrades. The House of Representatives passed the bill on Aug. 12, and President Joe Biden signed it into law on Tuesday.

For homeowners, this means that going green at home can be as much about saving green as it is about saving the planet.

“One-third of homeowners are concerned about their homes being damaged by climate threats, yet many are still putting off critical home projects,” says Steve Wilson, senior underwriting manager at home insurance site Hippo, citing recent findings from its June 2022 Homeowners Preparedness report. “More recently, this happens to be a result of high inflation rates that have driven up prices for residential home materials. These tax incentives help homeowners understand the types of home improvement tasks that support energy savings and environmentally sustainable homeownership.”

Let’s dive deeper into the Inflation Reduction Act and see how homeowners can benefit from the rebates and tax credits that are included.

What the Inflation Reduction Act promises for homeowners

The act delivers savings on both large and small-ticket green home improvements.

“The act is set to provide $1.6 billion in potential tax savings for homeowners in 2023 alone, up from $253 million in existing credits in 2022,” says Brian Rugg, chief credit officer of loanDepot.

The act delivers a 30% federal tax break for rooftop solar installations for 10 years, for example. It also provides savings of up to 30% on other household amenities, like heat pumps.

And there are several other smaller-scale improvements that homeowners can finance through the program.

“Taxpayers who purchase an Energy Star single-family new home can receive $2,500 in tax credit,” says Emma Loker, a real estate expert at Omah. “Those buying a home that meets the Department of Energy’s Zero Energy Ready Homes program requirements can gain a whopping $5,000 in tax credit.”

The act also allows up to $840 to offset the cost of heat-pump clothes dryers or electric stoves, up to $4,000 for electrical panel upgrades to support new appliances, up to $1,600 for insulation and sealing costs, and more.

“On top of the tax savings, homeowners may also benefit from lower energy costs due to increased efficiencies, which will place a reduced strain on power grids and reduce carbon emissions,” says Rugg.

How is this act different from others?

The act essentially rewards responsible consumer behavior and incentivizes homeowners who may be feeling the pinch of inflation. While it is partly an extension of the Nonbusiness Energy Property Credit, which expired in 2021, it does more.

Now, in addition to allowing homeowners to claim up to $1,200 a year or 30% of the total cost of eco upgrades at tax time, it also pledges up to $14,000 in rebates for energy-efficient updates.

“This bill promises homeowners a reward for spending more on environmentally friendly and energy-efficient home improvements and equipment,” says Adam Selita, CEO and co-founder of the Debt Relief Company in New York. “It is a nice gesture for homeowners who are definitely feeling the brunt of rising and unstable prices.”

It’s also very specifically targeted to home renovations, a rarity in federal bills.

“This type of law is usually passed at the state level, and for that reason, it almost feels like a state bill passed at the federal level,” Selita says.

Cost-effective green upgrades to consider: bigger projects

If you have the cash to front the expenditure on big-ticket items, knowing that you’ll be up for a rebate, then you’ll get more bang for your buck.

“The bill has a max rebate of $14,000 per household, which will help homeowners earn a tax rebate for replacing an HVAC system, reinsulating their home, upgrading electrical panels, installing a heat-pump water heater, or installing solar panels on their roof,” Selita says.

Some of the most effective energy-saving upgrades include replacing old, inefficient windows and exterior doors and upgrading to major appliances that meet Energy Star or International Energy Conservation Code standards.

Rugg says some mortgage lenders will even offer renovation loan products that will further incentivize you to make green improvements. For example, loanDepot’s greenAdvantage program offers customers pricing discounts for existing or new solar and geothermal amenities.

Cost-effective green upgrades to consider: smaller projects

If you’re not quite ready to transform your home with large-scale green investments, you can still make small changes that will have a big impact.

Install solar-powered lights outdoors: “They don’t require electricity and can be installed anywhere without access to electrical wiring,” says Richard Harless, owner and real estate agent at AZ Flat Fee in Tucson, AZ. Solar-powered outdoor lights can start as low as $20.

Install Energy Star–certified windows: “New energy-efficient windows will save you 25% to 30% on heating and cooling costs,” Harless says. Windows start around $325 each.

Use a low-flow showerhead: “A low-flow showerhead can help you save 25% to 60% on water and other bills as it reduces the energy used to heat shower water,” notes Harless. Low-flow showerheads start around $50.

As seen in:Realtor.com