[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.23-3]

[Page 45-49]
 
                       TITLE 26--INTERNAL REVENUE
 
     CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.23-3  Special rules.

    (a) When expenditures are treated as made--(1) Timeliness of an 
expenditure for the energy credit. In general, for the purpose of 
determining whether an expenditure qualifies as being timely for the 
residential energy credit under section 23 or former section 44C (i.e., 
is made after April 19, 1977, and before January 1, 1986), the 
expenditure is treated as made when original installation of the item is 
completed. Thus, solely for that purpose, the time of payment or accrual 
is irrelevant.
    (2) Special rule for renewable energy source expenditures in the 
case of construction or reconstruction of a dwelling. In the case of 
renewable energy source expenditures in connection with the construction 
or reconstruction of a dwelling that becomes the taxpayer's new 
principal residence, the expenditures are to be treated as made (for the 
purpose of determining the timeliness of an expenditure for the 
residential energy credit) when the taxpayer commences use of the 
dwelling as his or her principal residence following its construction or 
reconstruction. The term ``reconstruction'' means the replacement of 
most of a dwelling's major structural components such as floors, walls, 
and ceiling. When a taxpayer reoccupies a reconstructed dwelling that 
was the taxpayer's principal residence prior to reconstruction, a 
renewable energy source expenditure is considered made when the original 
installation of the renewable energy source property is completed.
    (3) Taxable year in which credit is allowable. For the purpose of 
determining the taxable year in which the credit for an expenditure is 
allowable (once it has qualified as timely under subparagraph (1) or 
(2)), an expenditure is treated as made on the later of (i) the date on 
which it qualifies as timely; or (ii) the date on which it is paid or 
incurred by the taxpayer.
    (b) Expenditures in 1977. No credit under section 23 or former 
section 44C shall be allowed for any taxable year beginning before 1978. 
However, the amount of any credit under section 23 or former section 44C 
for the taxpayer's first taxable year beginning after December 31, 1977, 
shall take into account qualified energy conservation expenditures and 
qualified renewable energy source expenditures made during the period 
beginning April 20, 1977, and ending on the last day of such first 
taxable year.
    (c) Cross reference. For rules relating to expenditures financed 
with Federal, State, or local government grants or subsidized financing 
see paragraph (d)(3) of Sec. 1.23-1 and paragraph (i) of Sec. 1.23-2.
    (d) Expenditures qualifying both as energy conservation expenditures 
and renewable source expenditures. In the case of an expenditure which 
meets both the definition of an energy conservation expenditure (as 
defined in Sec. 1.23-2(a))

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and a renewable energy source expenditure (as defined in Sec. 1.23-
2(b)), the taxpayer may claim either a credit under Sec. 1.23-1(b) 
(relating to qualified energy conservation expenditures) or Sec. 1.23-
1(c) (relating to qualified renewable energy source expenditures) but 
may not claim both credits with respect to the same expenditure.
    (e) Principal residence. For purposes of section 23 or former 
section 44C the determination of whether a dwelling unit is the 
taxpayer's principal residence shall be made under principles similar to 
those applicable to section 1034 and the regulations thereunder 
(relating to sale or exchange of a principal residence) except that 
ownership of the dwelling unit is not required. In making this 
determination, the period for which a dwelling is treated as a 
taxpayer's principal residence includes the 30-day period ending on the 
first day on which the dwelling unit would (but for this sentence) be 
treated as being used as the taxpayer's principal residence under 
principles similar to those applicable to section 1034. Thus, 
installation that are completed within that 30-day period may be 
eligible for the credit although, in the absence of the 30-day rule, the 
date of habitation of the dwelling unit by the taxpayer would mark the 
beginning of the taxpayer's use of the unit as a principal residence.
    (f) Construction substantially completed. Construction of a dwelling 
unit is substantially completed when construction has progressed to the 
point where the unit could be put to use as a personal residence, even 
though comparatively minor items remain to be finished or performed in 
order to conform to the plans or specifications of the completed 
building. For this purpose, construction includes reconstruction as 
defined in paragraph (a)(2). This rule may be illustrated by the 
following example:

    Example. On January 1, 1979, A purchases a dwelling that is to 
become A's principal residence. The dwelling unit was originally 
constructed in 1950. A spends $50,000 to reconstruct the dwelling by 
replacing most of the dwelling's major structural components such as 
floors, walls, and ceilings. Included in the cost is $3,000 attributable 
to energy-conserving components. Reconstruction is substantially 
completed on April 1, 1979, and A moves into the reconstructed residence 
on May 1, 1979. Since construction includes reconstruction, A's 
reconstructed residence is not considered substantially completed before 
April 20, 1977. Thus, amounts spent with respect to A's reconstructed 
residence for energy-conserving components do not qualify as energy 
conservation expenditures.

    (g) Residential use of property. To be eligible for the residential 
energy credit, expenditures must be made for personal residential 
purposes. If at least 80 percent of the use of a component or item of 
property is for personal residential purposes, the entire amount of the 
energy conservation expenditure or the renewable energy source 
expenditure is taken into account in computing the credit under this 
section. If less than 80 percent of the use of a component or item of 
property is for personal residential purposes, the amount of an 
expenditure taken into account is the amount that bears the same ratio 
to the amount of the expenditure as the amount of personal residential 
use of the component or item bears to its total use. For purposes of 
this paragraph, use of a component or an item of property with respect 
to a swimming pool is not a use for a personal residential purpose. The 
rules with respect to residential use of property are illustrated by the 
following examples:

    Example 1. In 1978 A makes an expenditure of $3,000 for the 
installation of storm windows of which 50 percent is on the portion of 
A's dwelling used as the principal family residence and 50 percent is on 
the portion of the dwelling used as an office. A has made no other 
energy conservation expenditures for the residence. The allowable energy 
conservation expenditure is $1,500 (50 percent of $3,000), the portion 
attributable to residential use. Therefore, the residential energy 
credit is $225 (the qualified conservation expenditure of 15 percent of 
$1.500).
    Example 2. During 1979, B makes $10,000 of renewable energy source 
expenditures on solar energy property for B's principal residence. 
Approximately 60 percent of the use of the solar energy property will be 
for heating B's swimming pool; the other 40 percent will be for heating 
the dwelling unit. B had not previously made renewable energy source 
expenditures with respect to the residence. Since use for a swimming 
pool is not considered a residential use, less than 80 percent of the 
use of B's solar energy property is considered used for personal 
residential purposes. Therefore, only $4,000 (40 percent of

[[Page 47]]

$10,000), the proportionate part of B's expenditures representing 
personal residential use, is treated as a renewable energy source 
expenditure. B is allowed a $1,000 residential energy credit (30 percent 
of $2,000 plus 20 percent of $2,000) for 1979.

    (h) Joint occupancy--(1) In general. If two or more individuals 
jointly occupied and used a dwelling unit as their principal residence 
during any portion of a calendar year--
    (i) The amount of the credit allowable under section 23 or former 
section 44C by reason of energy conservation expenditures or by reason 
of renewable energy source expenditures shall be determined by treating 
all of the joint occupants as one taxpayer whose taxable year is such 
calendar year; and
    (ii) The credit under section 23 or former section 44C allowable to 
each joint occupant for the taxable year with which or in which such 
calendar year ends shall be an amount which bears the same ratio to the 
amount determined under paragraph (h)(1)(i) of this section as the 
amount of energy conservation expenditures or renewable energy source 
expenditures made by that occupant bears to the total amount of each 
type of such expenditures made by all joint occupants during such 
calendar year.

The provisions of this subparagraph may be illustrated by the following 
example:

    Example. A, a calendar year taxpayer, and B, a June 1 fiscal year 
taxpayer, make energy conservation exenditures of $2,000 (A making 
expenditures of $500 and B making expenditures of $1,500) on their 
principal and jointly occupied residence in 1978. A and B have not 
previously make energy conservation expenditures with respect to this 
residence. Of the $300 credit (15 percent of $2,000), $75 will be 
allocated to A ($500/$2,000 x $300) and $225 to B ($1,500/$2,000 x 300). 
A will claim the allocable share of the credit on A's 1978 tax return 
and B will claim the allocable share of the credit on B's tax return for 
the fiscal year ending May 31, 1979.

    (2) Minimum credit. The fact that one joint occupant may be unable 
to claim all or part of the credit under section 23 of former section 
44C because of insufficient tax liability or because that occupant's 
allowable credit does not exceed the $10 minimum credit (as set forth in 
paragraph (d)(1) of Sec. 1.23-1) shall have no effect upon the 
computation of the amount of the allowable credits for the other joint 
occupants.
    (3) Prior expenditures. Because joint occupants are treated as one 
taxpayer for purposes of determining the residential energy credit, the 
maximum amount of energy conservation expenditures or renewable energy 
source expenditures must be reduced by the total amount of such 
expenditures made in connection with the dwelling unit during prior 
calendar years in which any one of the residents of the unit during the 
current calendar year was a resident (whether made by the current 
resident or by an individual previously occupying the dwelling with the 
current resident). However, the preceding sentence shall not apply to 
prior expenditures no part of which was taken into account in computing 
the credits under section 23 of former section 44C for such years. Prior 
years' expenditures are not to be allocated among joint occupants to 
take into account the specific expenditures of each of the occupants in 
prior years.
    (4) The rules of this paragraph may be illustrated by the following 
examples:

    Example 1. Assume A and B have together made prior years' energy 
conservation expenditures of $1,600 (A having made $1,200 of 
expenditures and B having made $400) on their principal and jointly 
occupied residence. In the current year, each makes energy conservation 
expenditures of $300 with respect to the same residence. The maximum 
qualified expenditure with respect to the residence is reduced by the 
$1,600 of prior expenditures made by A and B. Therefore, only $400 of 
the $600 current expenditures are eligible as energy conservation 
expenditures. The resulting residential energy credit is $60 (15 percent 
of $400) of which $30 apiece will be allocated to A and B ($300/$600 x 
$60). The fact that A had previously computed the credit in prior years 
with respect to $1,200 of the total $1,600 of expenditures is irrelevant 
to the apportionment of the credit in the current year.
    Example 2. In 1978, spouses C and D make $10,000 of renewable energy 
source expenditures with respect to their principal residence, half of 
which is paid by each spouse. No prior renewable energy source 
expenditures have been taken into account with respect to that residence 
by either C or D. C and D file separate returns for the calendar year. 
Under the joint occupancy rule, the maximum allowable renewable energy 
source credit with respect to C and D's principal

[[Page 48]]

residence is $2,200 (30 percent of the first $2,000, and 20 percent of 
the next $8,000 of expenditures). Half of this amount or $1,100, will be 
allowed to each spouse. If either spouse makes renewable energy source 
expenditures with respect to the same principal residence in future 
years, none of those expenditures would be qualified renewable energy 
source expenditures for which a credit can be claimed. That is, not more 
than $2,200 may be taken in the aggregate by C and D as a renewable 
energy source credit with respect to their principal residence.
    Example 3. In 1978, E and F make energy conservation expenditures of 
$1,500 on their principal and jointly occupied residence. In 1979, E 
moves away and G becomes the other joint occupant of the residence. F 
and G make energy conservation expenditures of $1,000 in 1979. In 1980 F 
moves away and H moves in with G. G and H make energy conservation 
expenditures of $500. The maximum qualified expenditure made by F and G 
with respect to the residence is reduced by the $1,500 of prior 
expenditures made in 1978 by E and F. The maximum qualified expenditures 
made by G and H with respect to the residence is reduced only by the 
expenditures in prior years in connection with the residence during 
which either G or H was a joint occupant. Accordingly, the maximum 
qualified expenditures made by G and H with respect to the residence is 
reduced only by the $1,000 of prior expenditures made in 1979 by F and 
G.

    (i) Condominiums and cooperative housing corporations. An individual 
who is a tenant stockholder in a cooperative housing corporation (as 
defined in section 216) or who is a member of a condominium management 
association with respect to a condominium which he or she owns shall be 
treated as having made a proportionate share of the energy conservation 
expenditures or renewable energy source expenditures of such corporation 
or association. The cooperative stockholder's allocable share of the 
expenditures is to be the same as his or her proportionate share of the 
cooperative's total outstanding stock (including any stock held by the 
corporation). However, in the case where only certain cooperative 
stockholders are assessed for the expenditures made by the cooperative 
housing corporation, only those cooperative stockholders that are 
assessed shall be treated as having made a share of the expenditures of 
such corporation. In such case, the cooperative stockholder's share of 
the expenditures is the amount that the stockholder is assessed. The 
allocable share of a condominium management association member's energy 
conservation of renewable energy source expenditures is the amount that 
the member is assessed (or would be assessed in the case where 
expenditures are from general funds) by the association as a result of 
such expenditures. The residential energy credit for a qualified 
expenditure is allowable for the year in which the association or 
corporation has completed original installation of the item (or has paid 
or incurred the expenditure, if later). For purposes of this paragraph, 
the term ``condominium management association'' means an organization 
meeting the requirements of section 528(c)(1) of the Code (other than 
subparagraph (E) of that section), with respect to a condominium project 
substantially all the units of which are used as residences.
    (j) Joint ownership of energy conservation property or renewable 
energy source property--(1) In general. Energy conservation property 
renewable energy source property include property which is jointly owned 
by the taxpayer and another person (or persons) and installed in 
connection with two or more dwelling units. For example, the fact that a 
windmill, solar collector, or geothermal well and distribution system is 
owned by two or more individuals does not preclude its qualification as 
renewable energy source property. The amount of the credit allowable 
under section 23 shall be computed separately with respect to the amount 
of the expenditures made by each individual, subject to the limitations 
of $2,000 imposed by section 23(b)(1) and $10,000 imposed by section 
23(b)(2), per dwelling units of jointly owned property. For example, in 
1982, A, B, and C purchased as joint owners renewable energy source 
property that serviced two houses. One of the houses is jointly owned 
and occupied by A and B and the other is owned and occupied by C alone. 
The renewable energy source property cost $30,000 of which A paid 
$9,000, B paid $6,000, and C paid $15,000. A and B must share the $4,000 
credit (40% of $10,000 maximum) with respect to the expenditures for the 
jointly owned house. Therefore, A is allowed a $2,400 credit ($4,000 
times $9,000 divided

[[Page 49]]

by $9,000 plus $6,000) and B is allowed a $1,600 credit ($4,000 times 
$6,000 divided by $9,000 plus $6,000) with respect to the expenditures 
attributable to the jointly owned house. C is entitled to a credit of 
$4,000 with respect to the expenditures attributable to the other house.
    (2) Example. The application of this subparagraph may be illustrated 
by the following example:

    Example. A, B, and C each has a separate principal residence. They 
agree to finance jointly the construction of a solar collector, each 
providing one-third of the costs and taking one-third of the output of 
the collector. Each will separately pay for the costs of connecting the 
solar collector with his or her principal residence. Provided the solar 
collector and connection equipment otherwise qualify as renewable energy 
source property, A, B, and C will each be considered to have made 
renewable energy source expenditures equal to one-third of the cost of 
the collector plus his or her separate connection costs. Such 
expenditures will be subject to the limitations and other rules 
separately applicable to A, B, and C with respect to each principal 
residence, such as those with respect to the $10 minimum (Sec. 1.23-
1(d)(1)), prior expenditures (Sec. 1.23-1(d)(2)), residential use 
(paragraph (g) of this section), and joint occupancy (paragraph (h) of 
this section).

    (k) Basic adjustments. If a credit is allowed under section 23 or 
former section 44C for any expenditure with respect to any property, the 
increase in the basis of that property which would (but for this 
paragraph) result from such expenditure shall be reduced by the amount 
of the credit allowed.
    (l) Recordkeeping--(1) In general. No residential energy credit is 
allowable unless the taxpayer maintains the records described in 
paragraph (l)(2) of this section. The records shall be retained so long 
as the contents thereof may become material in the administration of any 
internal revenue law.
    (2) Records. The taxpayer must maintain records that clearly 
identify the energy-conserving components and renewable energy source 
property with respect to which a residential energy credit is claimed, 
and substantiate their cost to the taxpayer, any labor costs properly 
allocable to them paid for by the taxpayer, and the method used for 
allocating such labor costs.

[T.D. 7717, 45 FR 57719, Aug. 29, 1980. Redesignated and amended by T.D. 
8146, 52 FR 26672, July 16, 1987]