Solar Tax Credits: What Residential and Rental Property Owners Need to Know

Solar tax incentives have been in place for years, but recent expansions have sparked a surge in solar installations across the country. Both residential and rental property owners are now benefitting from new federal tax credits designed to accelerate the adoption of clean energy and sustainable practices.

The Inflation Reduction Act (IRA) of 2022 expanded and extended key solar tax incentives aimed at lowering the overall cost of installing solar energy systems. Many of these tax credits took effect in 2023, fueling widespread investment in solar energy systems last year.

According to the U.S Treasury Department, 752,300 households installed rooftop solar panels and related features, claiming an average tax credit of just over $5,000, which covered up to 30 percent of the total project cost. Their research suggests these households will save an estimated $2,230 on electricity costs per year.

This increase in solar installations comes as a surprise, as what was initially projected to cost $2.4 billion in first-year incentives ultimately reached $6 billion claimed for solar projects alone, with another $2 billion for other energy-efficient home improvements, such as windows and air-conditioning systems, far surpassing initial estimates, according to the US Treasury.

The shift in consumer interest reflects the potential impact these enhanced tax incentives can have. For homeowners of residential properties, one of the most popular incentives comes through the Residential Clean Energy Credit.

Residential Properties: Residential Clean Energy Credit

As part of the IRA, the Residential Clean Energy Credit (RCEC) provides a tax credit for homeowners who install solar energy systems on their primary residences. Second homes may also qualify if certain conditions are met. This credit covers 30 percent of the total cost of solar installations, including associated costs such as battery storage systems.

Traditional building components associated with the installation of clean energy systems, such as roofing trusses or shingles, do not qualify for the tax credit. Only the clean energy components—such as solar roofing tiles or solar shingles—can be included in the claim. The RCEC also covers eligible installation costs, including labor for on-site preparation, assembly, and the necessary piping or wiring to connect the system to the home.

The incentive remains available through 2032, with the credit gradually phasing down to 26 percent in 2033 and 22 percent in 2034, before continuing to phase out until it expires in 2036.

Commercial and Rental Properties: Investment Tax Credit and Production Tax Credit

Solar credits are also available for businesses through the Investment Tax Credit (ITC) and the Production Tax Credit (PTC). Both offer attractive financial perks for short- and long-term rental property owners and commercial businesses installing solar energy systems. However, the two credits generally cannot be claimed on the same property, except in some cases with co-located systems.

From 2022-2033, the ITC offers businesses a tax credit up to 30 percent of the total installation costs for solar projects such as solar panels, battery storage, solar water heaters, and solar-powered HVAC systems. Starting in 2025, the ITC will transition to a technology-neutral clean electricity credit, which will still allow for a 30 percent credit, but applies to any zero-emission electricity-generating project. This transition expands the scope of eligible projects beyond just solar, making it applicable to a broader range of clean energy technologies. The new ITC will also be available through 2032 but will begin to phase down to 26 percent in 2033, 22 percent in 2034, 15 percent in 2035, before eventually expiring in 2036.

Business owners claiming the ITC can also depreciate the cost of the solar installation, allowing them to accelerate the recovery of their initial investments. For projects placed in service during 2024, businesses can claim 60 percent bonus depreciation, dropping to 40 percent in 2025. However, the depreciable basis must be reduced by half of the value of the tax credit.

The PTC, on the other hand, provides a tax credit based on the electricity generated per kilowatt-hour by solar and other eligible technologies during the first 10 years of the system's operation. Solar systems placed in service in 2022 or later and begin installation prior to 2033 are eligible for a 2.75 ¢/kWh PTC if they comply with the Treasury Department’s labor standards or are under 1 megawatt in size.

Unlike the ITC, claiming the PTC does not reduce your depreciable basis.

Arizona’s Income Tax Credit for Residential Solar Devices

In tandem with federal tax incentives, many states offer their own tax credits to help taxpayers further reduce the cost of energy-friendly installations and maximize their savings.

Arizona offers a solar tax credit of up to $1,000 for homeowners who install solar systems on their primary or secondary residence, which can be carried over for up to five years if it exceeds the taxes owed. In addition, Arizona provides a property tax exemption for the added home value from solar installations, ensuring no increase in property taxes due to solar energy upgrades. The state also offers a sales tax exemption on eligible solar equipment, exempting homeowners from paying sales tax on their solar energy systems.

Next Steps

The combination of federal and state tax incentives creates a tapestry of opportunity for individuals and businesses looking to adopt solar energy systems in a more affordable and financially rewarding way. By leveraging these incentives, homeowners and businesses can greatly reduce their upfront costs while benefiting from long-term energy savings.

Contact an R&A advisor to learn more about solar tax credits for your home or business.