Does the installation cost of a solar panel system qualify for the 30% tax credit for a residential rental property?

[genomix]

I own a home that I rent out for residential use.  I am considering converting the home to solar power with roof panels.  The installer says that the solar system qualifies for the 30% federal tax energy credit.  However, tax literature is confusing on this subject as, some, but not all, reports indicate that solar power installation for residential rental property does not qualify for the 30% federal tax credit; rather, the installation expense should be depreciated over 5 years as a business expense.  Thus my question:  does solar panel installation for rental property qualify for the 30% federal energy tax credit, or is installation cost a business expense to be depreciated over 5 years?

[TomD8 · Accepted solution]

If you're eligible for the solar tax credit, yes, the installation costs are included.

Sec. 25D provides a solar tax credit to an individual taxpayer when the panels are installed for use in the taxpayer's residence. Under Secs. 25D(d)(1) and (2), solar water-heating panels and solar electric (photovoltaic) panels must be installed for use in a dwelling located in the United States and used as a residence by the taxpayer. Thus, Sec. 25D does not allow a credit when solar panels are installed for use in a residential rental property the taxpayer owns.

In Notice 2013-70, which provides guidance on Sec. 25D, the IRS further clarified this issue. Question 6 in the notice asks whether the credit is available for improvements made to a second home, for example, a vacation home or an investment property. In its answer, the IRS specifically states that while the credit may be taken for solar panels installed for use in a vacation home, the taxpayer may not claim the Sec. 25D credit for expenditures for improvements made to an investment property, such as rental property, that is not also used as a residence by the taxpayer.

https://turbotax.intuit.com/tax-tips/going-green/federal-tax-credit-for-solar-energy/L7s9ZiB4D

[Edited]  For rental/investment property, instead of the solar credit you may be eligible to take an Investment Credit (IRS Form 3468).  See page 4 of this IRS reference:  https://www.irs.gov/pub/irs-pdf/i3468.pdf

[TaxGuyBill]

I can't find it now, but I would say YES, the installation cost qualifies to be part of the credit.

The credit for solar power for a business/rental property is part of the Investment Tax Credit on Form 3468 (tax Code §48).   It is a parallel of the personal tax credit in Section 25D, and I have read somewhere that the same rules for installation apply (and the installation costs are specially included for the personal credit, so they should also be included for the business/rental credit).

[SweetieJean]

You may be able to take a credit of 30% of your costs of
qualified solar electric property, solar water heating property,
small wind energy property, geothermal heat pump property,
and fuel cell property. Include any labor costs properly allocable
to the onsite preparation, assembly, or original installation of the
residential energy efficient property and for piping or wiring to
interconnect such property to the home.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i5695.pdf">https://www.irs.gov/pub/irs-pdf/i5695.pdf</a>

[TomD8]

But you can't take the solar credit on rental property, unless you also have personal use of the property - in which case you must prorate the credit according to your percentage of personal use.

[TaxGuyBill]

@TomD8   As I mentioned about, there is a separate, parallel credit (Section 48) that applies to business/rental property, and the IRS (or courts) have applied the same rules in connection with installation costs.

[TomD8]

I am going by this:  <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-drop/n-13-70.pdf">https://www.irs.gov/pub/irs-drop/n-13-70.pdf</a>

[SweetieJean]

<a rel="nofollow" target="_blank" href="https://www.thetaxadviser.com/newsletters/2017/oct/credit-residential-solar-panels.html">https://www...>

[TomD8]

Sec 25D and Sec 48 give contradictory info, and I agree that Sec 48 appears to give support for claiming the credit.  Does 48 supersede 25D?

[genomix]

Thank you all for your responses- all very good.  Collectively, your responses did confirm my original conclusion that the tax laws on this subject are confusing and contradictory.  About half of the responses indicate that I can receive the 30% federal tax credit for qualifying solar panels installed on my rental property, the other half said no, because it is not a personal residence.  I wish the Turbo Tax people would weigh in on this subject in a definitive manner as the topic is not too esoteric. Thanks again.

[TaxGuyBill]

They are just two separate credits for different situations.

The Notice 2013-70 is only referring to the §25D credit, which is only for personal-use homes.  As that notice says, you can't use the §25D credit (Form 5695) for rental homes.

However, a completely different credit is the §48 credit (Form 3468), which is only for business/rental property.  That credit CAN be used for rental property.

[SweetieJean]

I agree with TaxGuy Bill.

[marionfarleycpa]

I just now ran into the question with a client regarding taking the solar credit on a commercial self rental property.  I understand the distinction between the 2 code sections.  Section 24 does not apply.  But I cannot find anything definitive that says the credit can be taken for solar commercial rental property.  The credit is clearly allowable for business property, but is a rental activity a "trade or business" for purposes of this credit?  If the credit was to be allowed for rental property, then the credit would be a passive activity credit and thereby possibly limiting the tax credit. Many years ago, the investment tax credit could only be used for property placed into service in a trade or business and a rental activity was not a trade or business.  I agree, confusion.  Still trying to figure out what to tell my client!!!

[Carl]

First some clarification.

Tax credit: Lowers your tax liability dollar for dollar. So if your tax liability on line 11 of the 1040 is say, $1000 and you have a $300 tax credit, that changes your tax liability to $700.

Tax Deduction: Lowers the amount of your income that is taxes. So if you have $10,000 of income taxed at 10% that means your tax liability is $1000. Then ifyou have a 10% tax deduction that reduces the taxable income to $9,000 and your tax liability is $900.

To answer your question, no you can not take the 30% solar tax credit on the property because it's not your primary residence. Period. However, if certain conditions are met you may qualify for the investment credit (IRS Form 3468)  Instructions on page 4 at https://www.irs.gov/pub/irs-pdf/i3468.pdf

[JFE]

Sec 25D(d)(2) clearly has no requirement that the credit only applies to your primary or main residence. 

(d) (2)Qualified solar electric property expenditure

The term “qualified solar electric property expenditure” means an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer.

Also form 5695 Residential Energy Credit states that the home doesn't have to be the taxpayers main home.

Qualified solar electric property costs. Qualified solar
electric property costs are costs for property that uses solar
energy to generate electricity for use in your home located in the
United States. No costs relating to a solar panel or other
property installed as a roof (or portion thereof) will fail to qualify
solely because the property constitutes a structural component
of the structure on which it is installed. The home doesn't have to
be your main home.