If you install solar panels on your rental property, you can potentially qualify for a tax credit of up to 30% of the cost of the solar installation. That’s a tax credit, which means it’s not merely reducing your taxable income, instead it can actually reduce the amount of tax you pay by 30% of the cost of the solar installation.
Does a rental property qualify for a solar energy tax credit?
Yes. But, if you do a Google search to try to find out if you can get a tax credit for installing solar panels on a rental property, most of the results will say you can’t qualify for the residential solar tax credit with a rental property. And in a way, they’re correct. The tax code section 25D residential solar energy credit is only available to people who are installing solar on their residence (their home, or a secondary home). But what they aren’t aware of is that there is a completely separate business credit that is available to rental property owners under section 48 of the tax code.
A Technical Analysis of the Tax Code
Section 25D is only available for a residence that isn’t just a rental. But the section 48 tax code offers business credits that include a solar energy credit. Section 48(a)(5)(D) specifies that the credit is available for tangible property that can be depreciated, which would include rental property. This is an added wrinkle in that code section 50(b)(2) specifies that the credit is not available for property that is “used predominantly to furnish lodging.” But just below that, it adds clause 50(b)(2)(D) which provides an exception for “energy property,” which is what makes the solar credit available for rentals even though most of the other business credits are not.
Requirements
First, there are some requirements to be aware of, including:
- The system can’t be leased or secured with financing that is a non-recourse loan (for example, it can’t be a loan just secured by the panels themselves without any personal guarantee). You must own the system.
- You must retain ownership of the property/panels for at least 5 years (otherwise you would have to pay back a portion of the credit if you sell the property within 5 years).
- There are “prevailing wage and apprenticeship requirements” as detailed in IRS Notice 2022-61, but this doesn’t apply to systems under 1 megawatt, which would be any residential solar installation.
How to Claim the Credit
The credit for installing solar panels can be claimed using tax form 3468. The relevant solar credit is the Investment Tax Credit (ITC) in Part VI of the form. You will also need to complete Part I lines 1–14 (and Line A for credit figured in section M).
Increased Credit Amount Statement Requirement Confusion
In Part I of form 3468, line 7 asks if the system is under 1 megawatt, and if so you will choose option 7a in Part I. If it’s under 1 megawatt, that should mean you don’t have to meet the “prevailing wage and apprenticeship requirements.” But there is some confusing information in the IRS instructions for form 3468 that say you have to attach an “Increased Credit Amount Statement” (with prevailing wage and apprenticeship info) if you select box 7a. In April 2024, the IRS issued a correction to the instructions to clarify that you do qualify for the 30% credit when you choose option 7a. But they still didn’t clarify if you still need to attach an “Increased Credit Amount Statement” in that case. It doesn’t make sense that the statement would be needed for systems under 1 megawatt. So my opinion, and the opinion of some other tax professionals, is you can submit the form without attaching a statement if you are selecting box 7a.
If your tax software gives you a notice about needing to attach a statement, and you selected option 7a for a system under 1 megawatt, you can ignore that notice because no statement should actually be required. Alternatively, you could attach a statement that says something like “the taxpayer’s solar energy project is under 1 megawatt and is not subject to the prevailing wage requirement or construction beginning date requirement per IRC 48(a)(9)(B).” But in my opinion, you can submit it with no statement attached because a statement shouldn’t be needed.
Depreciation
When depreciating the cost of the system, you must reduce the basis that you can depreciate by half of the value of the credit that you received. That means that with the 30% credit, 15% of the value of the system can’t be depreciated. That leaves 85% of the cost of the system that can be depreciated. The depreciation is eligible to qualify as bonus depreciation, allowing you to get a bigger tax deduction that first year.
Offsetting Non-passive Taxes
This is an important nuance to be aware of. If your rental income is considered passive income, then the solar tax credit can’t be used to offset your taxes from your non-passive (job / business) income. Unless you qualify for an exception (detailed below), the solar tax credit can only offset taxes you pay on your rental income. If your rental income isn’t creating tax due (because of depreciation, for example), then the solar tax credit is carried forward as a “passive activity credit” on form 8582-CR. In that case, the credit will get carried forward indefinitely until you eventually have taxes generated by the rental property. Unlike suspended passive losses, the passive activity credit doesn’t get unlocked when you sell the property. If you sell the property with the passive activity credit associated with it, you only get to use the credit to increase your basis in the property, which isn’t as much of a tax advantage as a tax credit.
Rental income is passive by default, unless you qualify for either real estate professional status or the short-term rental strategy. In that case, your solar tax credit from the rental can reduce your overall tax bill, including offsetting your taxes from your W-2 or business income.
Does it make sense to install solar on a rental property?
It’s worth addressing whether it makes sense to install solar panels on a rental property in the first place. If you have a short-term or mid-term rental, most likely you’re already paying the utilities rather than the tenants, so in that case the benefits of ongoing savings from solar panels are more immediately apparent.
If it’s a long-term rental where the tenants are paying the utilities, the value of solar is less apparent. In that case, the appeal may just be the potential to charge higher rent, but with the incentive that the tenants will get to enjoy lower monthly utility bills. It may even make sense to consider moving to an “all utilities included” arrangement, which can be appealing to tenants. You may also want to consider an arrangement where you bill tenants each month based on the value of the solar power the panels provide each month (using monitoring software that can report the amount of energy generated).
Help Claiming the Solar Credit for a Rental Property
If your tax preparer doesn’t have the expertise to claim the solar tax credit for your rental property, or if you’re doing your taxes yourself and you need assistance, you can contact me for assistance with it.
FAQ
Does the cost of batteries (such as a Tesla Powerwall) qualify for the credit? According to Treasury Regulations 1.48-9, “auxiliary equipment” such as batteries can qualify for the credit if at least 75% of the power used to charge the batteries comes from wind or solar (as measured on an annual basis).
