Robin A. Friedman of Kiplinger’s personal finances
If you’re thinking about converting your home to solar, you have a lot of companies. According to the U.S. Treasury Department, more than 750,000 families who filed their 2023 tax returns by May 23, 2024 had requested a rooftop solar residential energy tax credit, reporting more than $20.5 billion in eligible solar property costs.
Homeowners are converting it to solar for good reason. It certainly is an attractive outlook to cut down on your electricity bill or eliminate it completely. Especially if you live in areas with high utility costs, or in areas that require heating or air conditioning most years.
Ask Sean Elibradebert, 63, a stand-up comedian from Pelham, New York, about 30 minutes north of Manhattan. In July 2022, Bridebert added 22 solar panels to his four-bedroom colonial-style home. “I switched to solar for a number of reasons,” he says. “I’m interested in the environment, but that was a side benefit. The main reason was economic. If it hadn’t paid for it, I wouldn’t have done it.”
Breidbart still heats the house with natural gas, but he uses electricity to power the central air conditioning and electrical appliances in the home, charging the Tesla Model Y.
Breidbart used both federal and state tax credits to fund his solar conversion. The 2022 Inflation Reduction Act includes provisions that increase the solar energy tax credit for federal homes to 30% of the cost of installing solar panels between 2022 and 2032. This credit will decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034.
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Evaluate energy savings and payback period
The basic formula for calculating the rate at which you can recover your investment in solar is to split the cost of solar power by amounts that save you annually. For example, let’s assume that after applying a qualified incentive, the net cost of a solar system is $27,000. If you spend $3,600 a year on electricity ($300 a month) and expect to cut your electricity bill to zero by installing solar panels, you can even break your investment in 7.5 years from now. This is the average payback period for solar installations, according to Energysage, an online solar marketplace where homeowners can compare shops among pre-screened installers. Energysage also offers a free calculator to estimate potential savings and payback periods at www.energysage.com/solar/calculator.
Lisa Vanderbulk decided to convert her 2,000-square-foot home in Mendon, Massachusetts to solar in July 2023, and in April 2024 her system was completed and revitalized. She still uses oil for heat and hot water. “We could have gotten a cheaper system with fewer panels, but we thought it would be better to get a little bigger,” she says. All the power her panel generates will go back to the grid and “banked” until needed.
Before converting, her electricity bill was $300 a month. Now it’s zero. Vandervalk paid $40,000 for the $27,000 net cost system after federal and state tax credits. She hopes it will break even after eight years.
Funding Options
These are the most common ways to fund solar conversion.
Pay cash. This is the easiest way to fund solar systems. If you have enough savings to cover the full cost up front, simply write a check. You pay no interest and own the system entirely.
Tap Home Equity. Many homeowners are currently sitting in cash cash due to rising home prices in many parts of the country. According to Intercontinental Exchange (ICE) (ICE), Technology and Data Provider, at the end of the third quarter of 2024, the average homeowner on a mortgage had $319,000 in shares in his home (you can borrow while keeping a 20% stake while keeping a 20% stake). Due to its many equity, many homeowners have chosen to use Home Equity Credit Line (HELOC) or Home Equity Loans to fund solar conversion.
Funding from solar contractors. Many solar contractors usually provide funding through related third-party lenders. Contractors may encourage financing transactions. Typically, monthly payments that reflect the price after the tax credit is applied can look attractive. But read the detailed print. “Dealer fees are often burned to the price you pay,” says Mark Durenberger, founder and president of New England Clean Energy in Hudson, Massachusetts.
Leasing the system. If you decide to lease your solar system, you may not have any upfront costs, but according to energy you will get monthly payments for the entire lease period (usually 20 years). And if you lease solar panels, don’t forget to not own them. And perhaps more importantly, you’ll lose access to the 30% federal tax credits available only to the owner. The lease company will obtain credits instead.
Leases can also complicate future sales of your home. “Buyers have several options when purchasing a home with solar panels for rent,” says Bill Banfield, chief business officer at Rocket Company, the parent company of lender Rocket Mortgages. “They can decide they don’t want panels and ask the solar company to remove them. If the buyer wants to maintain the panels and they do not choose to pay off the outstanding leases in advance, the ongoing payments to the solar company will be included in the debt-to-income ratio used to qualify for the mortgage and calculate the price.” This can affect the ability of the buyer to qualify for the mortgage.
Tax credits and other incentives
A federal tax credit for solar power systems is to increase the amount of income tax you normally borrow by $1. To qualify for a 30% credit, your solar system must be installed in a US-owned residence. Eligible costs that can be applied to tax credits include solar panel costs, labor costs, wiring and other accessories necessary to operate the system, energy storage devices such as batteries, and sales tax on eligible costs.
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