Upfront costs are steep

Geothermal heat pumps circulate liquid (usually water mixed with an antifreeze solution) through pipes buried in the ground. During winter, heat is absorbed from the ground and pumped into a home. The warm air is circulated by a fan via ductwork. In summer, heat from inside a home is dispersed underground. Geothermal heat pumps can be equipped to heat household water as well.

A typical residential geothermal heat pump has a 3-ton capacity, according to the U.S. Department of Energy. A unit of that size would cost about $7,500, twice what you’d pay for a standard furnace and air conditioner. What jacks up the price toward $20,000 is the work involved in laying the extensive network, or loop, of pipes underground. The DOE says it’ll take between five and 10 years to recoup your initial investment.

The most common type of residential geothermal heat pump is a horizontal closed-loop system. Pipes are buried in trenches dug between four and six feet deep. More costly is a vertical closed-loop system that relies on pipes installed in holes drilled between 150 and 400 feet deep. Other types of systems require a nearby water source like a well, pond, or lake.

Upkeep is minimal after installation

If you install a geothermal heat pump in an existing home, budget for landscaping. You’ll need to restore your lawn once the digging is done. The good news: Underground pipes should last 50 years or more. If your house doesn’t already have ductwork in place, that’ll need to be added to the final price tag.

Because a system has few moving parts, maintenance is minimal. The pump unit itself should last 25 years. As an added benefit, geothermal heat pumps are quieter than standard heating and cooling systems. Figure installation will take about four days.

Look for an installer certified by the manufacturer of the system or by the International Ground Source Heat Pump Association, or get referrals from people who’ve had geothermal systems installed. The GeoExchange website lets you search for contractors by state.

Tax credit, energy savings add up

A geothermal heat pump placed in service between Jan. 1, 2009, and Dec. 31, 2016, is eligible for a 30% federal tax credit. The system must meet certain efficiency standards. All geothermal heat pumps rated by Energy Star, the federal energy-efficiency program, qualify. Energy Star was scheduled to release updated guidelines on eligible systems in late 2009.

The credit can be applied to a geothermal system installed at your primary residence or a second home. New homes qualify, too. Since below-ground temperatures are consistent, homeowners aren’t limited by region. However, the size of a property and the composition of its soil and rock help determine whether a geothermal system is feasible.

Use IRS Form 5695 to claim the tax credit. Save receipts as well as a copy of a certification statement from the manufacturer that attests to the tax credit-worthiness of the system. Your credit can’t exceed your total tax liability for the year, but you can carry forward the credit to future years. Consult a tax adviser.

A geothermal system is considered sustainable because it eliminates the need for natural gas or heating oil. While it does require electricity to run the pump and fan, it draws 25% to 50% less than traditional HVAC systems, according to the U.S. Environmental Protection Agency. A typical homeowner can save about $600 annually on heating and cooling costs.

If your system is equipped with a device called a “desuperheater,” expect your water-heating costs to be eliminated in summer and cut in half in winter. (During summer, the heat being extracted from your home is used to warm the household water supply before it’s dispersed below ground.) That’s about $115 off the average annual water-heating bill. You’ll still need a standard water heater—either a storage-tank or tankless model—to supply hot water the rest of the time.

This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.