A 9,000-square-foot home with passive solar design, geothermal heating and cooling, a rooftop array big enough to power two regular houses, and rainwater harvesting cisterns beneath the courtyard is being built on a mountainside outside of Santa Fe. The proprietors take environmental issues seriously.
Additionally, they have claimed a property tax abatement from the state for the LEED certification they are pursuing, structured the project to reduce their federal tax liability by about $60,000 from the solar and geothermal installation alone, and funded the entire construction through low-interest margin loans backed by their investment portfolio rather than through any transaction that would be recognized by the IRS as taxable income, all with the help of a highly recommended tax attorney.
The house is really green. Additionally, it is intentionally partially funded by the federal government as well as the states and municipalities that would absorb the uncollected property tax money. The Inflation Reduction Act of 2022 extended the Residential Clean Energy Credit, which offers homeowners a 30 percent federal tax credit for renewable energy installations that meet certain requirements, such as solar panels, geothermal heat pumps, and battery storage systems. This credit has no income cap. This is intentional: regardless of the taxpayer’s income level, the policy was designed to maximize the adoption of renewable energy, and it succeeds.
Additionally, it implies that the size and expense of the installation directly affect the absolute dollar benefit. When a middle-class household invests $20,000 in rooftop solar, they receive $6,000 in credits. A wealthy homeowner makes $60,000 after spending $200,000 on a huge estate’s complete solar and geothermal system. The percentage remains unchanged.
The sum in dollars is not. In contrast, the EV tax credit completely fades out for people making more than $150,000, a restriction that has been criticized for restricting who is eligible. There is no comparable restriction on the home clean energy credit for geothermal and solar power, and nobody in the policy debate appears particularly keen to highlight this.
No news release regarding climate incentives mentions the “buy, borrow, die” aspect of these transactions. Rich homeowners frequently borrow against their portfolios at low rates, use the loan proceeds to build the house, and pay down the loan over time from income or dividends without ever recognizing a taxable event. This is in contrast to selling appreciated stock to fund construction, which would result in capital gains tax on the appreciation.
Revenue from loans is not considered income. They have never been. This is a structural aspect of the tax system that predates the Inflation Reduction Act by decades, not a loophole in the sense of an inadvertent drafting error. Combining it with clean energy credits, however, has a compounding effect: the installation lowers federal tax burden on top of the tax-free borrowed capital used for construction.
The inheritance component is the most elegant technique to complete the loop. The stepped-up basis clause eliminates the capital gains tax on any appreciation that occurred during the original owner’s lifetime when a highly subsidized eco-mansion is passed to heirs. A $15 million estate that was acquired and constructed using a combination of federal credits, state tax exemptions, and borrowed funds transfers to the following generation with a $15 million new cost basis.
The property’s appreciation during the decades of ownership is permanently removed from the capital gains computation. The house was built for less than its sticker price, has increased in value, and passes on the whole, tax-free appreciation to heirs.
It’s difficult to ignore the fact that these mechanisms, which are politically popular, individually defendable, and actually helpful for decarbonizing the built environment, build up in ways that mostly benefit those who need them the least. This is not an argument against subsidies for sustainable energy, which are really lowering emissions and installation costs.
When the borrowing rules permit wealth to move around without ever becoming taxable, the basis rules are designed to reward asset holders, and the credits have no caps, it is an observation about who the system is optimizing for. The mansion in Santa Fe is being completed. Its carbon footprint will be extremely little. Additionally, it will receive very favorable tax treatment.
