Can interest from a solar loan be deducted if renters are paying for it?

[ocelotjoy]

Hi! I own a house where I'm renting out rooms. I paid for solar panels to be installed and financed the project through taking out a loan with a local credit union. This loan isn't secured by my home's equity, and is essentially like a personal loan. I read different things on the internet about whether property owners can deduct interest from loans other than mortgage loans as an eligible business expense. Currently, my roommates are paying me a small amount each month to cover their electricity "costs" because if they didn't pay for a part of the solar loan, their electricity would cost actually $0 per month even though they're actively using electricity. Is it possible for me to deduct in an itemized deduction the interest portion of the monthly solar loan payments? If so, where would I deduct it on my itemized return? Would it go under the "Utilities" section because this is where they're paying for the solar.

Thanks for answering!

[RobertB4444]

You should be taking the amounts that your tenants pay you towards 'utilities' as income.  Then deductions related to that income are allowed.  Which would include that interest.

@ocelotjoy 

[ocelotjoy]

Hi Robert,

Yes, I am counting their solar payments as "income" because I see the solar bill as a utility that they're covering like all the rest that they chip into for their part. I pay the majority of the solar loan payment, so your answer is helpful! I'll count the interest then as an eligible expense.

Do you think it's okay to have it go in the "utilities" section of rental property expenses? Or another category? And I shouldn't include the full solar monthly payment, right? Just the interest per month?

Thanks for answering these questions!

[Opus 17]

This is a real mess and there is a lot you aren't saying.

First, if you install solar panels on a home that is partly your residence and partly a rental, you can only claim a partial credit.  Specifically, if less than 80% of the property is personal use, you must reduce your credit.

Second, you say your tenants are paying a "small amount" toward utilities.  Are you treating this as a rental on schedule E?  Are you charging rent at or above fair market value (what a landlord would charge a stranger to rent a similar property in the same neighborhood) or is this a more casual arrangement among friends or relatives?

Generally, if you are renting to strangers at a fair market rate, all the money you receive is "rent", even if you consider that it covers different categories (use of kitchen, space in garage or parking lot, utilities, etc.)  Then your expenses are whatever you pay to the utility company, mortgage, property taxes, property insurance, maintenance, etc.  

If you are renting below market rate, especially to family or friends, then there are a number of limitations on deducting rental expenses.  This type of use may also be considered "personal use", that further limits you as to reporting it as a rental. 

The solar credit is completely separate from monthly utility bills.  On your own residence, you claim the credit one time only, as of the date the system is installed.  You claim the entire contracted price when the system is installed, even if you are paying over time.   If more than 20% of the property (by square footage) is a rental or other kind of business use, then you must determine the percent of personal use and only claim that percent of the cost.  In other words, if you rent 25% of the house, and 75% is your personal residence, and the system cost $20,000, then you can only claim the credit on $15,000 of installation costs.  If business use is less than 20% and personal use is more than 80%, you can claim the entire amount.

There is a separate solar panel credit for business property (section 48, I believe) that I don't know much about.  I think it is 10%, and you might be able to claim that on the business percentage that is not eligible for the 30% credit on the personal portion. 

[ocelotjoy]

Hi Opus17,

You're correct that I am learning how to handle my finances and taxes now that I'm a homeowner. I'm not sure if my answers will make you think I'm more or less a mess 🙂 lol, but I would still love your advice regardless.

I've got a main house and an in-law unit that's got its own kitchen, heating, water heater etc. I have been renting out solely to friends. They are paying below market value, whether they're choosing my spare bedroom in the main house or they're living in the in-law unit. I thought I had to report all the money I get from them for both their portion of the utilities and their monthly rent as a part of doing my taxes. My friends pitch into their share of utilities, and that also includes giving a certain amount of money to go to the monthly solar loan payment. Since they weren't relatives, I didn't think I could avoid reporting the money I receive from them as income and I didn't want to do anything that could be construed as tax evasion. Right now, in terms of square footage, I "rent" out 42% of my house between the in-law unit and the spare bedroom.

This is my second year doing this, and if I can count everything as personal use, I would. If you're saying I can make this all personal use, I truly would. I don't really see myself as a landlord or as a business, but I've been tracking everything and inputting expenses from a more conservative understanding of what/who counts towards personal use. I'd love to hear your advice and thoughts. I was told by friends to consider myself and my house like a rental property, but if they're wrong, I'd love to reduce and/or eliminate all the expenses because I don't see myself making a profit as much as just paying down my own mortgage with help. I live in CA if that makes any difference.

Thanks!

[Opus 17]

@ocelotjoy 

I need to refer you to someone with more experience with landlord-tenant situations. 

@Carl 

@Hal_Al 

In general, if you are renting at below market rate, that prevents you from taking full advantage of your rental situation.  For example, suppose fair market rent is $1000 per month, and your expenses for mortgage, utilities, insurance and repairs are $800/month.  You can also deduct depreciation (wear and tear).  Suppose that is $300/month.  In that case, even though you have a positive cash flow of $200/month, you have a tax loss of $100/month that can offset other taxable income.  However, if you are renting at below market rate (say $600 per month) the most expenses you can deduct are $600.  Meaning that you have no taxable profit, but you lose the benefit of those remaining expenses that can't be deducted.

I believe that days rented at below market rate are counted as personal use.  However, I would like to have that double-checked.  You are still required to report the income, but usually your expenses will be more than the rent and that will negate the income but not result in further deductions, as noted above.  Here are some links.

https://www.irs.gov/taxtopics/tc415

https://laporte.com/knowledgecenter/tax-services/tax-consequences-of-charging-below-market-rent

https://www.irs.gov/publications/p527

Turbotax should do this for you if you indicate you are renting below market rate.

Then the language used in the solar credit section 25D is "non-business" use.   Here, my conclusion is that "personal" use as defined in the rental regulations is the same as "non-business" use as defined in the solar credit, so you could take the full credit.  However, you may want to run this past your own tax professional.