CLIENT KNOWLEDGE BASE

    Solar Tax Credits for Investment Properties

    At Anomaly, we always follow government incentives.  Whether it is oil or clean energy (funny right), the government will provide you with tax incentives.

    With the ongoing shift toward renewable energy, the U.S. government has now incentivized solar investments through tax credits, making it attractive for individuals and businesses to install solar systems on investment properties. 

    Solar can be confusing - there are two different portions to consider:
    • Solar on your PRIMARY Residence = 30% tax credit (IRC 25D) (vacation homes do not qualify)
    • Solar on your Investment Real Estate OR Business = 30% tax credit & depreciation (IRC 48)

    Key Point - the amount of CASH DOWN does not matter!  The credit (and depreciation for business) are available even if you finance 100%.

    In this KB, we will focus on the Investment Tax Credit under Section 48. This guide covers the basics of the federal solar tax credits, eligibility for investment properties, tax code sections involved, and how to claim the credits.

    1. 1

      Relevant Tax Code Sections

      The key tax code sections that govern solar tax credits for investment properties are:

      • IRC Section 48: Governs the Investment Tax Credit (ITC), applicable to businesses and investors. It is a nuanced tax code section in which we are able to navigate to claim the credit with rentals properties done properly (see passive trap below). 

      • IRC Section 25D: Covers residential energy credits for personal use properties but does not apply to investment properties. However, Section 48 covers similar credits for business and investment purposes.
    2. 2

      Eligibility of Solar Tax Credits for Investment Properties

      This is a source of confusion for both CPAs and investors.  The rules are complex, but done properly we are confident in executing this strategy for your rental property.

      Oftentimes, solar salesman say you can claim the 25D credit, but they are sadly very mistaken, you cannot.  You must use this tax code section which has limitations.  

      • Placed in Service Requirement: The solar system must be “placed in service” during the tax year for which the credit is claimed. This means it must be operational and producing energy.

      • Ownership Requirement: You MUST own the solar energy property. If you lease the system, they cannot claim the ITC.

      • Qualified Expenditures: The credit applies to the cost of solar panels, installation labor, wiring, and other necessary items (check with your PM for questions here).
    3. 3

      Credit Percentage

      Under current rules, the ITC allows you to claim a percentage of their eligible installation costs as a credit against federal income taxes. The credit rate depends on the year the system is placed in service:
      • 30% for systems placed in service from 2022 to 2032
      • 26% for systems placed in service in 2033
      • 22% for systems placed in service in 2034
      • 0% (no credit) for systems placed in service after 2034

      These rates apply to both residential and commercial installations, including rental and investment properties.
    4. 4

      Calculating the ITC for Investment Properties - Make sure you account for everything!

      The ITC for investment properties is calculated as a percentage of the total eligible costs associated with purchasing and installing the solar system. 

      From our experience, these costs typically include:
      • Solar panels
      • Inverters
      • Racking and mounting hardware
      • Balance of system equipment
      • Installation labor costs

      For example, if an investment property owner installs a solar system with a total cost of $100,000 in 2023, they would be eligible for a 30% credit, resulting in a $30,000 ITC.  You will be happy when we deliver that tax return to you!
    5. 5

      Depreciation Benefits on Investment Properties

      In addition to the ITC, commercial property owners who install solar systems can claim depreciation deductions on the system’s value typically over five years OR use BONUS Depreciation! 

      However, if the ITC is claimed, the basis of the solar system must be reduced by 50% of the ITC amount.

      For example:
      • Total system cost: $100,000
      • ITC claimed: $30,000
      • Reduced depreciable basis: $85,000 (100,000 - (30,000 x 0.5))

      The ability to combine the ITC with depreciation makes solar a financially advantageous investment for commercial property owners.
    6. 6

      Passive Activity Rules for Rental Properties - A Trap!

      Investment property owners should consider the passive activity loss rules under IRC Section 469. The ITC is a nonrefundable credit and can only offset passive income from the rental property. If you have limited passive income, unused credits may carry forward to future years or use an ANOMALY PIG strategy!  

      Ex - You own a long term rental in which you put $100k of solar on the property.  You have no other passive income and are not a REP.  Your $30k credit will NOT offset your business or W2 income and will carryforward.  Be very wary here with solar salesman who say otherwise...
    7. 7

      Exception to the Passive Activity Rules

      If you operate a Short Term Rental OR own the building where your business operates from, you may be able to avoid the passive activity rules. Check with your Anomaly PM as this is a complex area of the tax code.

      Beyond anything, ensure that you thoroughouly understand your return on investment BEFORE and after the tax benefits.  Put it this way, if you live in northern Canada...this may not be a good idea!

    If you still have a question, we’re here to help. Contact us