Can I Depreciate Solar Panels on a Primary Residential Property that I converted to a Rental?

[Anonymous]

I had solar panels installed on my primary residence in 2017 and took the tax credit to do so. It was my primary residence. In 2019 I moved and converted the property to a rental. Am I able to add the solar panels as an asset and depreciate them when calculating my deductions for the rental property?

[MarilynG1]

Yes, you can add the solar panels as a Rental Asset and depreciate them as a deduction.

Be sure to subtract the amount of the tax credit you received from the Cost when you set up the asset in the Rental Section. 

[Anonymous]

Assuming it would be categorized as "rental real estate property? Which category should it be entered as?

[Carl]

Yes, you can depreciate the solar panels. However, you must subtract whatever tax credit you received from the cost basis. Since the panels are "a physical part of" the structure now, they get classsified as residential rental real estate and depreciated over 27.5 years.

If the panels are placed "in service" on the same date the property itself is, then it's easier/simpler just to add your allowed cost to the cost of the structure - *NOT* the cost of the land.For example, if on the structure you have:

COST: $100,000

COST OF LAND: $30,000

Then after subtracting your tax credit from the cost of the solar panels lets say you have $10,000 to depreciate. Change your above values to:

COST: $110,000

COST OF LAND: $30,000

Now, the program "Knows" that $70,000 gets depreciated over the next 27.5 years.

If you want to enter the panels as a separate asset, that's fine too. There's pros and cons to both ways. I myself would enter them as a separate asset. That's because in the event of something such as a hurricane, more than likely the solar panels will be damaged before the structure is damaged, and it makes it simpler to handle the asset with the insurance payout and all that stuff.

As a side note, when you convert a personal use property such as your primary residence, to rental property, take special note that your standard homeowner's insurance policy *WILL* *NOT* cover you. You need to either convert that existing policy to a rental dwelling policy, or purchase a completely separate rental dwelling policy. Whichever you you, insist that the solar panels be included in that policy. Remember, if it's not in writing, then it *DID* *NOT* *OCCUR*. So y our agent can talk the talk all day long. What they say doesn't mean squat. Insist it be in writing and endorsed by the policy underwriter.

[JayinIC]

What about depreciating solar panels on a primary residence?  Can that be depreciated?  Most people live in state's with net metering, so in some months, they earn small amounts from their electric utility when the panels produce more than the residence needs.   Would that allow for claiming depreciation for the panels?  Thanks. 

[DoninGA]

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@JayinIC wrote:

What about depreciating solar panels on a primary residence?  Can that be depreciated?  Most people live in state's with net metering, so in some months, they earn small amounts from their electric utility when the panels produce more than the residence needs.   Would that allow for claiming depreciation for the panels?  Thanks. 

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Nothing on a personal residence, not used in a business or as a rental, can be depreciated.

[Tom188]

The reply : "Nothing on a personal residence, not used in a business or as a rental, can be depreciated."

I don't see that the reply digs far enough to answer the question.  More specifically, the power company pays the homeowner-taxpayer sometimes for producing more electricity than the homeowner consumes, and at other times the homeowner gets credit against his/her power consumption.  Is this net-metering relationship with the power company a business relationship involving income producing solar property (on which taxes can be owed for the income to the homeowner for the excess power generated).  Does this business relationship thereby make the solar system depreciable (and thereby eligible for the investment tax credit under Sec 48 --and its safe harbor timing provisions). I understand that some accountants think so, but I would sure like to know if there is anything definitive.  Does the taxpayer have a choice to take the residential solar tax credit under Sec 25 and the investment tax credit under Sec 48 where there is this net-metering business arrangement for the solar installation?

[BillM223]

The IRS says, "A trade or business is generally an activity carried on for a livelihood or in good faith to make a ..."

But people don't add solar panels in order to earn a profit, but to reduce monthly electric bills, and if these bills are negative in some months such that the homeowner gets a rebate, so much the better.

But if the solar panels lost money every month, would the homeowner tear the panels out? Almost certainly not, because they were not installed for a profit motive in the first place.

Cover your backyard with dozens or hundreds of panels so that you always sell power back to the utility, well, you could make the argument that THAT is a business and business assets can be depreciated. But I doubt very much that the IRS would buy your argument for depreciating the solar panels on your house - and the amount you would save would not be worth the hassle if audited.

P.S., any depreciation reduces the basis of your home, so that when you sell the home, your gain is increased...and worse, the depreciation must be recaptured as ordinary income (i.e., not covered by the $250k/$500k exclusion).

@Tom188 

[rvrboso]

Over how many years do you depreciate solar panels on residential rental property?

[BrittanyS]

The amount of depreciation depends on a variety of factors, including the size and type of system installed, as well as local tax laws. In most cases, you can expect a solar energy system to depreciate over a period of 5-7 years.

[vintinck]

The only reason installing residential solar makes sense is because you can sell power back to the utility. Without this arrangement, you wouldn’t buy the panels. I don’t know the exact numbers but I bet 30-50% of the power produced is sold to the utility. Would this not be similar to buying a car and using it as an Uber 50% of the time to help make the car payments? 

[Carl]

The only reason installing residential solar makes sense is because you can sell power back to the utility.

That's not the only reason. People I know (about 10-12) that have installed solar on their residence have done so with the primary intent to reduce their electric bill. If they produce excess power and sell some back, then that makes it better. But they didn't install solar with their primary intent being to produce power and sell it back. Some months they do sell some back (typically the winter months here in FL which might be 3 months if you're lucky) and some months they just have a substantially lower bill (Typically the summer months).

[Mike9241]

if you converted your residence to rental, you could depreciate all costs, except the cost allocable to the land, including the panels. but remember tax basis must be reduce by the credit you got. any money received for selling excess power to the utility would be taxable. 

[vintinck]

Sure, but you don't produce power at night, or when the sun is not out. So even if you are paying a 0$ on your electric bill and not getting any excess credit back you likely are using power from the grid (a night) and overproducing during the day to acquire credits to pay for night time usage. If you have a battery, you may be able to do this without being connected to the grid. Residential solar without battery storage really only makes sense with this relationship with the utility. 

[George Grin]

I think the prior answer was correct.

"Nothing on a personal residence, not used in a business or as a rental, can be depreciated."

In states (e.g. Oregon) where the excess power sent back to the utility can onlyx be an offset to the power received from the utility, I don't think you can plausibly even argue that such an arrangement is a a trade or business for the homeowner.

 In states where there is net metering and the utility buys back the power for cash, in theory the homeowner might argue that he/she is engaged in trade or business, but good luck with that argument if challenged by  the IRS.  In a typical residential solar installation in that situation, the homeowner's best case probably  is relying on the audit lottery.