This article is reproduced with permission from Spidell Publishing, Inc.
Although some companies tout that solar panel payments are “tax deductible” or “may be tax deductible,” these statements are misleading. Many taxpayers have been mislead and believe that the full cost of their solar panels will be deductible on their income tax returns. The confusion stems from programs that allow homeowners to pay for these panels on their property tax bills.
Both the PACE (Property Assessed Clear Energy) and HERO (Home Energy Renovation Opportunity) programs allow homeowners to finance solar panels through their property tax bills. Although the payments are made through the property tax bill, they are not deductible as property tax payments. The best way to address these payments is to treat them as a second mortgage for home improvements. This would mean that the interest portion of the payment is a deductible payment, but the principal portion is not. The cost of the solar panels is an improvement and would increase the taxpayer’s basis in the property.
Deductible property tax payments
Over the years, there has been much debate about what portions of the property tax bill are deductible. California conforms to federal law on this issue and, in 2012, the IRS issued guidance addressing when items not based on the assessed value of the property or non–ad valorem taxes are deductible.
IRS Information Letter 2012-0018 states that assessments based on anything other than the assessed value of the property may be deductible in certain circumstances if they are levied:
- for the general public welfare;
- by a proper taxing authority;
- at a like rate; and
- on owners of all properties in the taxing authority’s jurisdiction.
Amounts assessed only on specific properties for a local benefit (such as for solar panels) cannot be deducted as real property taxes. However, taxpayers are permitted a deduction for the portion of the local benefit assessments that were imposed to repair, maintain, or meet interest charges for these local benefits.
California does not offer a credit for the installation of solar panels. For federal purposes, there is a 30% credit for the installation of qualified electric property, qualified solar water heating property, geothermal heat pumps, and small wind energy property. The credit applies for property placed in service through December 31, 2016.
Property tax exclusion
Although the solar panel payments are not deductible as property taxes, the installation of the panels will not result in an increased property tax assessment. A qualified solar energy system is not considered new construction that is subject to reassessment.
For more information about this article, please contact our tax professionals at email@example.com or toll free at 844.4WINDES (844.494.6337).