Depreciating solar panels on rental home

[operaflute]

I'm not seeing any consistent info on depreciating solar panels on rental homes.

I've purchased panels for a rental. I've seen in some places they are a 5 year property, other places 27.5.  Which is it, and what do I select in the TT Deluxe asset descriptions to end up with the correct type property?  So far, I have not found anything helpful in IRS pubs, either.

Thank you for any direction on this!

[Carl]

Based on what I read in IRS Publication 946, page 29 at https://www.irs.gov/pub/irs-pdf/p946.pdf it's 5 year property. But if it is "a physical part of" the structure, there's nothing wrong with classifying it as residential rental real estate and depreciating it over 27.5 years. I myself would prefer the 27.5 year route, since that keeps the depreciation I"m required to take each year, significantly lower.

Additionally, be aware that you do not qualify for the "home energy tax credit" on this, since those panels are not on your primary residence.

[operaflute]

Oh, silly me for looking for that info in Rental Income/Expenses pub.  Thank you for leading me to that page/pub!
I think there is the Investment Credit to be had, still, though? I've seen something about a 30% credit, and depreciating 85% after that (which is interesting math in itself)...

[Carl]

I think there is the Investment Credit to be had

As I recall, there's some kind of "business" energy tax credit you may qualify for on rental property. I just want to make you aware that you do not qualify for the "home" energy credit, since the property is not your primary residence.

[operaflute]

Right. Got it. Thanks.

[Bryant17]

I'm not seeing any consistent info on depreciating solar panels on rental homes.

I've purchased panels for a rental. I've seen in some places they are a 5 year property, other places 27.5.  Which is it, and what do I select in the TT Deluxe asset descriptions to end up with the correct type property?  So far, I have not found anything helpful in IRS pubs, either.

Thank you for any direction on this!

[AnnetteB6]

As discussed in the post above by Carl, there is an argument to be made for either 5-year or 27.5 year property.  If the solar panel is installed as a permanent part of structure of the house, it really should be considered as 27.5 year property because it is a component of the house itself.

Taking a look at it from the homeowner's insurance side, insurance companies also consider solar panels to be a part of the house itself because they are considered a permanent attachment to your property.  

If your particular solar panels are not installed on the roof of the house, but are completely separate from the house structure itself, then you have a better case for a shorter depreciation.  

When you are working through the Schedule E Rental Income and Expenses section of your return, you would go to the Assets section to enter the solar panels for depreciation.  Choose Rental Real Estate Property, then Residential Rental Real Estate.  Next, you will be asked for the details of the cost.  There will be a box for land.  You can either leave it blank or enter zero for the cost of land.  The end result will be the solar panels are depreciated over 27.5 years.

@Bryant17 

[Carl]

One could also argue that even if the solar panels are physically separate from the house, they are still considered to be "a physical part of" the property. Therefore the entire system is classified as residential rental real estate and depreciated over 27.5 years.

The panels themselves would be the only thing separate from the house, while all the other equipment to interface with the home's existing commercial electrical system would be "a permanent part of" the structure. It's not like if you sell the house, you can unplug the system and take it with you. Installation of this equipment generally requires a certified electrician and it must pass an inspection before the power company will allow it to be connected and/or activated on any structure that is a part of their electrical grid.

[Tdawg4evr]

Actually, you can take a Tesla Solar System with you.

[AbrahamT]

If that's the case, why don't you find out from the company you bought it from what its expected useful life is and use that figure. From combing through my research, it seems like it could be anywhere between 5 and 7 years. 

[dcortez]

We own a rental property as "Real Estate Professionals" as we spend the required time on our real estate business. So we can deduct depreciations losses currently against other income, i.e. interest, div, gains, SS income, etc. 

So if we put solar panels on our rental property roof, it would pay to depreciate over 5 yrs. 

One problem. the depreciation is recaptured when we sell the property.  So this defers taxes, not eliminates them.  

Anybody disagree?

[Opus 17]

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@dcortez wrote:

We own a rental property as "Real Estate Professionals" as we spend the required time on our real estate business. So we can deduct depreciations losses currently against other income, i.e. interest, div, gains, SS income, etc. 

So if we put solar panels on our rental property roof, it would pay to depreciate over 5 yrs. 

One problem. the depreciation is recaptured when we sell the property.  So this defers taxes, not eliminates them.  

Anybody disagree?

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The idea with depreciation recapture is that it is better to save money now and pay it back later when it is worth less due to inflation.  Plus, having the money in the mean time is valuable on its own, because you can invest it or use it for other interesting things.  In other words, if you can claim a $5000 tax deduction now, then even if you have to repay the $5000 in the future, having the $5000 in your pocket in the mean time can allow you to invest or use it in other ways, and $5000 will be worth less in the future due to inflation.

That being said, I think the idea of depreciating solar panels over 5 or 7 years, instead of 27.5 years, is absurd.  You would have to report yourself as being in the business of making and selling energy, so that you could claim a business depreciation rather than a rental depreciation, and I suspect that would not survive audit. I certainly wouldn't want to do that myself unless I had hired an accountant who endorsed it and who agreed to represent me and defend me at any audit. 

[AmeliesUncle]

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@Opus 17 wrote:

That being said, I think the idea of depreciating solar panels over 5 or 7 years, instead of 27.5 years, is absurd.  

You would have to report yourself as being in the business of making and selling energy, so that you could claim a business depreciation rather than a rental depreciation, 

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The law says that "equipment which uses solar energy to generate electricity" is five year property.

There is no requirement for it to be a "business" to be five year property; the five years applies to any solar that is subject to depreciation.

[dcortez]

The only caveat I would add is that if you own rental income property and are licensed to be a "real estate professional" (check the right properties in TT .. IF you qualify), the faster depreciation options (i.e. solar equipment on your roof), would reduce your taxable income and if a taxable loss, you would be able to offset that  loss against other taxable income.  Regardless, that cumulative drepreciation is recovered if and when you sell the property.  

[Mike9241]

also unclear is wether the solar panels are real property then depreciation recapture is 1250 gain or personal property which is 1245 gain (no preferential 1250 tax rate)