The New Mexico legislature just finished up its special session last week, and they did it without passing an extension to the state’s popular solar tax credit for homeowners. The tax credit, in its current form, allows for a nice chunk of money to return to the pockets of homeowners who installed solar in the previous year, and it’s currently set to expire at the end of 2016.
The credit differs from a rebate, in that instead of money off the price of a solar system, the taxpayer has to wait until the end of the year. Then, if their New Mexico tax burden is high enough, they’ll get 10% of the cost of their system back as a refund.
So what happens if the tax credit is allowed to expire? Well, we ran the numbers on New Mexico, and the findings might surprise you.
First, let’s look at how the numbers add up in New Mexico right now. We’ll use the example of a typical 5-kW installation in Santa Fe as our test case. Here’s how it shakes out:
- Installing a typcial 5-kW system will cost you around $20,000. Don’t panic! That number is going to go down fast.
- Let’s start with the state tax credit. At the end of year 1, you’ll get $2,000 back as a refund. Cool!
- The feds are a little more generous. They’ll give you 30% of the cost of your system back in a federal tax refund. That’s a whipping $6,000, meaning after tax time, your system will have cost you only $12,000.
- There’s another great incentive in New Mexico, and it’s called a performance payment. On top of reducing your bill, your electric company will pay you 2.5 cents for every kilowatt-hour (kWh) your system produces. That might not sound like a lot, but it adds up to about $200 per year, for 14 years. That’s big!
- Don’t forget all the money you’ll save by not paying for electricity. In the first year, that’s $1,039, and it just gets bigger from there, because electricity prices go up, while your system is fully paid-for.
- After the first year, and all those great incentives and energy savings mean your system only cost you $10,761.
- Finally, the value of your home increases by about 20 times your annual energy savings. We’re talking nearly $21,000 in new value—and New Mexico doesn’t tax any of it! Thanks, New Mexico!
- Now comes the important part. What kind of return are you going to see on that $12,000 investment? Well, we’ll tell you: over the 25-year life of your system, you will save (aka profit) nearly $29,000. Wow.
Keep in mind that these numbers are just estimates. Your home is unique and a good quote relies on that uniqueness. Luckily, we know a few great solar installers in New Mexico. Simply sign-up to get free, customized quotes from installers in your area.
So what happens if the New Mexico tax credit goes away? That $2,000 in savings is key, right? Maybe a little bit. It represents a change in the internal rate of return for your investment of about 2.2%, bringing it from 12.6% to 10.4%. A 10.4% return on investment is still huge, beating the historical stock market average by a wide margin.
Even without the tax credit, solar in New Mexico is still an amazing investment. And the tax credit doesn’t expire until late next year, so what are you waiting for?
Oh, you don’t have $20,000 to spend on solar? Can you still make a good profit over 25 years? YES! Here’s how:
Our Solar Strategy for New Mexico
That chart up above represents the possible profits you can make with solar. The green bars are for people who pay outright for a system, and it’s clear to see that those people make more money. But look at the orange bars! They show what happens if you get a solar loan and pay it off over time, and the results are surprisingly close to the outright payment.
First, we’d get quotes from trusted local installers in New Mexico. Then we’d find a local credit union or bank that offers home equity loans or solar loans. Something with a 20-year term at around 6% interest would be great. We’ll start out with a loan payment that’s a little bit higher than our current electric bill, but we’ll be saving a lot of money on electricity, too. The final cost will be about $20/month more than we’re paying now.
Here’s the important part We have to use the tax credits (both federal and state) we get at the end of year one to pay down the loan early. That $8,000 will reduce the time it takes to pay off the loan by more than 9 years, saving us thousands in interest. After 11 years, our system will start making us money, because we’ll own it free and clear! Here’s the coolest part: after 25 years, we’ll have saved close to $29,000 on not paying electric bills.
So don’t worry. Even without the tax credit, solar is an amazing investment in the Land of Enchantment.
Last modified: June 18, 2015