Geothermal = Geofrustrated

(Brendan)

By now we had hoped to be doing a post announcing that we added a geothermal heating and cooling system to our project, which we were really excited about. In case you haven't heard of geothermal heat pumps, they've been around for a while but have always been prohibitively expensive and so haven't been widely used in residential construction projects. The advantage of geothermal systems is that they can cut your heating and cooling expenses by around 70% since the Earth itself is used as the means of providing energy. Even that energy cost savings hasn't made geothermal systems economical, as it can take as long as 15 years to recoup the up-front installation cost.

Curious how it works? This 2-minute clip gives a good, very high-level explanation (pardon the Canadian accent :-)

So if geothermal systems are so expensive, why were we considering adding it to our project? The first economic stimulus package (November 2008) included a provision providing a tax credit of 30% of the cost of installation of a geothermal heating/cooling system with no cap on the credit amount. Quite simply, taken at face value this is a huge tax credit that, in one fell swoop, seemed to make geothermal systems affordable. Our general contractor's calculations showed that when the tax credit was taken into account the payback period for installing a geothermal system could be as little as 3 years, and as much as $40,000 in total energy cost savings would be gained over the first 20 years of living in the home. This was too good to pass up, and despite the difficulty of adding the installation cost to our construction loan, we decided to do everything we could to get geothermal into our project.

Funny thing is, though, I asked our tax advisor to take a look at the tax credit and, at the last minute, he actually caught the fact that the credit is of the "non-refundable" variety. What this means is that the credit can reduce your federal taxes paid to zero, but not below zero. In other words, we would have to pay well into the 5 figures in federal taxes to actually recoup the full amount of the projected tax credit. Our tax advisor informed us that since we have four kids in the home and get the "per child" tax credit for all of them, plus taking into account all of our itemized deductions, we only paid $856 in federal taxes last year. Bottom line, there was no way we could get the full tax credit next year, and even though it could be carried forward to future years it might be 10 years (at our pace) before we finally get the full amount. Goodbye geothermal (thank God he caught this now!).

It's a big oversight on the part of the government (who knew?), as the first-time home buyer tax credit ($8,000) was structured as a "refundable" credit where one could get the full amount regardless of the amount of taxes paid, and yet the geothermal credit (which will always work out to be far higher than $8,000) was not structured in this same way. This means that the only people who could really take advantage of the geothermal credit would be very wealthy people (likely with no kids) who pay A LOT in federal taxes.

Though this was disappointing, deleting geothermal from our project definitely helped our loan situation (which we are still slogging through). And I always wondered in the back of my mind if we really were going to see the projected cost savings since our home will already be so energy efficient (SIP wall construction, radiant heating, highly energy-efficient windows, etc.). Lastly, I cringed to think of what geothermal installation might have done to our nicely wooded lot. Here's a pic of a system being installed (below), I am reminded of the grand canyon.