Many homeowners have opted to fund the cost of adding solar panels to their homes by entering into a lease or a power purchase agreement with companies like SunPower or OneRoof. But what are the tax rules if you want to own the system yourself and use the tax credits to reduce your own taxes?
Internal Revenue Code Section 25D provides an income tax credit equal to 30 percent of the cost of solar panels (including installation costs) on the taxpayer’s residence. The credit is available even if the taxpayer is subject to the alternative minimum tax, as many homeowners are in states like California and New Jersey where solar is popular. The credit does not apply to solar panels installed after 2016.
The Section 25D credit broader in scope than the Code Section 48 investment tax credit claimed by investors: it is expressly available for expenditures for “solar panel(s) or other property installed as a roof (or portion thereof)”, even if “it constitutes a structural component of the structure on which it is used.”
The credit is available for solar panels installed on a “dwelling unit that is located in the United States and is used as a residence by the taxpayer”. Thus, solar panels installed on vacation homes are eligible for the credit. Further, the credit is on a home-by-home basis – so you can claim the credit once, sell your home, buy a new home and claim the credit for solar panels on the new home.
The credit is not available to the extent the cost relates to equipment used to heat a swimming pool or a hot tub.
The Section 25D tax credit is not subject to the “passive activity loss rules” of Code Section 469, so the Section 25D tax credit may be used to offset the income tax liability associated with your salary or investment portfolio.
The Section 25D credit does reduce the tax basis of the solar panels. The reduction is for the full amount of the credit (in contrast to the Code Section 48 investment tax credit, claimed by investors, for which tax basis is reduced by 50 percent of the investment tax credit). As a practical matter, the reduction in tax basis should not matter, until the home is sold. And then for the sale of a principal residence (i.e. not a vacation home), there is an exemption for the first $250,000 of gain (or $500,000 for married taxpayers filing jointly).
There are drawbacks of owning a home solar system yourself. First, you cannot deduct the depreciation while a solar company can. Second, there may be additional maintenance services provided by a solar company providing solar panels that may not be provided to homeowners that own their own solar systems.
But what about state tax credits? A helpful resource that has information on every state is http://www.dsireusa.org/. A word about New York State: New York has a tax credit of 25 percent of the cost of the solar system; however, the credit is capped at $5,000. In addition, there also is a New York credit for lease and power purchase agreement payments. The New York solar tax credit is limited to principal residences located in New York, so no vacation homes. Further, even if you pay New York income taxes on your salary from a New York employer, you cannot claim the credit for solar panels on your home in Connecticut or any other state other than New York.