Energy credits offer property owners a chance to save on taxes while supporting renewable energy with energy-efficient upgrades. For business owners with investment properties, these incentives could reduce costs and improve long-term profitability. However, not all rental properties are eligible. Understanding which energy credits you can take on your investment properties can help you maximize tax benefits, reduce liability, and align with energy efficiency goals.
These federally backed credits lessen tax burdens on eligible property owners. Eligibility is based on improving energy performance of residential properties, commercial properties, or business operations.
The federal government offers two key energy tax credits: the Residential Clean Energy Credit and the Energy Efficient Home Improvement Credit.
- Residential Clean Energy Credit: This credit applies to qualifying renewable energy systems, such as solar panels, wind turbines, geothermal systems, and battery storage. The credit provides a 30% credit on all eligible costs for installing these systems between 2023 in 2032.
- Energy Efficient Home Improvement Credit: This credit offers up to $3,200 annually for taxpayers who make property improvements like installing skylights and energy-efficient insulation.
Eligibility Requirements:
- The upgrades must be made to properties located in the United States.
- The improvements should meet energy efficiency guidelines, typically certified by Energy Star or similar bodies.
- For non-owner-occupied properties, specific terms may apply (see below).
People may be able to apply certain credits towards rental or investment properties depending on exactly how they use the properties and which improvements they make to those properties.
Qualifying Energy Upgrades:
- Renewable energy systems like solar energy systems can benefit properties used as primary residences or second homes. However, applying these credits to rental properties comes with limitations. Improvements such as energy-efficient windows or air conditioners, for example, generally apply only if the property serves as a qualifying residence for part of the year.
Landlords vs. Owner-Occupants:
- People who rent out full time likely won’t qualify for energy-efficient home credits. However, landlords upgrading properties, such as adding solar panels or geothermal heating, may claim the Investment Tax Credit (ITC) under certain conditions.
- For partially occupied properties, taxpayers may divide credit eligibility based on how the property is used during the tax year.
Understanding these distinctions can ensure no money is left on the table while remaining compliant with federal rules.
While energy tax credits offer substantial tax benefits, they come with limitations that need to be understood before filing tax returns.
- Non-refundable Nature: Most federal energy tax credits, including the residential clean energy credit, are non-refundable. This designation means you can only reduce your tax liability to zero. In other words, you won’t receive a refund for amounts exceeding your liability.
- Depreciation Impacts for Rental Properties: If you claim a credit for installing efficient energy systems on a rental, the cost basis of those systems may require depreciation adjustments.
- IRS Exclusions: Certain items are often excluded from credit eligibility. For instance, a fuel cell system only qualifies if installed on an owner-occupied property.
- Carryforward Options: If your credit amount exceeds your tax liability, some credits allow for unused portions to be applied to future years. The Inflation Reduction Act, for example, expanded such benefits.
By understanding these implications, you can prepare accurate tax preparation plans while maximizing your tax benefits under the law.
Energy-efficient improvements can transform an investment property into a more sustainable, cost-effective asset while also offering enticing tax benefits. If you’re a business owner or property investor, understanding which improvements qualify you for credits helps you maximize both your savings and your property’s value.
Adding solar energy systems to a rental property or dual-use investment can make a significant impact on your utility bills and tax liability. The Investment Tax Credit (ITC)—commonly referred to as the federal solar tax credit—offers property owners the chance to claim up to 30% of the installation costs of solar panels. This credit applies to the tax year in which the system becomes operational and is particularly beneficial for those planning long-term real estate investments.
For rental properties, eligibility under the ITC depends on ownership and how the property is used. Keep in mind that leased systems often do not qualify, so direct ownership is crucial.
Beyond savings on tax returns, solar panels can increase your property’s value, attract energy-conscious renters, and lower that property’s carbon footprint..
There a growing number of incentives for renewable energy technologies that may be applicable to both residential and investment properties, including:
- Geothermal heating and cooling systems: These systems are ideal for long-term energy cost savings and property improvements. These systems are recognized under several federal credits, including the ITC.
- Energy-efficient water heaters: Certain water heater models may qualify for both federal tax credits and rebates.
- Biomass stoves: Homeowners who install stoves that efficiently burn wood products or other biomass materials can also qualify for energy tax credits.
Energy Star-certified products meet strict efficiency criteria established by the Environmental Protection Agency (EPA) and Department of Energy (DOE). Many certified products are eligible for numerous federal tax credits, like the Energy Efficient Home Improvement Credit.
For property owners, this fact means that upgrading everyday components can lead to reduced property tax implications and long-term energy savings. Look at it as a win-win: lower operating costs paired with tax deductions.
Many states and utilities offer lucrative rebates that supplement federal tax incentives. Programs vary widely, but resources like the DSIRE database provide an up-to-date registry of rebates and local incentives.
Popular options include:
- State-specific rebates: Many states match federal incentives by offering cash rebates for efficient property improvements.
- Utility-driven incentives: Some regions provide credit to renters and homeowners for reducing peak energy use or installing more efficient equipment.
- Inflation Reduction Act provisions: This updated measure allows more people to apply for credits and long-term funding for renewable improvements.
Property owners often face complex scenarios where simple mistakes can lead to missed opportunities or penalties. Here’s how a CPA or tax advisor can play a pivotal role in the tax preparation process.
Claiming energy credits like the Residential Clean Energy Credit or the Energy Efficient Home Improvement Credit involves detailed documentation and accuracy in filing. A tax professional ensures your eligibility by evaluating factors like property use, ownership, and the nature of your upgrades.
- Accurate Completion of IRS Form 5695: This critical form helps you calculate and claim residential credits related to green energy and efficiency improvements. Tax advisors are well-versed in ensuring it’s filled out properly and submitted with your income tax return in compliance with federal guidelines. They can point out expenditures that qualify and ensure you don’t overestimate or underestimate.
- Specialized Knowledge for Property Owners: If you’re a landlord, your situation likely requires more nuanced documentation. For example, rental properties don’t always qualify in the same way that primary residences do. Tax professionals adhere to IRS energy property rules, enabling a smoother claim process.
- Avoiding Costly Errors: Filing mistakes, like claiming credits on ineligible properties (e.g., a property rented year-round with no personal use), can draw audits or penalties. A qualified CPA mitigates these risks.
A tax professional can help you create a strategy that aligns with your business goals and tax calendar to stretch maximum benefits from each project.
- Optimal Installation Planning:
- To maximize your credit, your installer must complete eligible improvements during a single tax year. For instance, geothermal systems installed by December 31 help you claim the 30% federal solar tax credit for that year. Tax professionals can assist in planning installations at the right time to avoid missing deadlines.
- Spreading Investments Across Tax Years:
- If you’re addressing multiple properties or making extensive property improvements, distributing projects over multiple tax years can help you maximize annual caps. For example, the Energy Efficient Home Improvement Credit has a $3,200 annual limit. A CPA ensures your expenditures are divided strategically to prevent wasted credit potential.
- Incorporating Other Incentives:
- Beyond federal credits, many states and utilities provide rebates for efficient energy improvements. Tax advisors ensure these rebates are factored into your overall strategy.
- Depreciation Strategies:
- For landlords, improvements like geothermal systems may impact depreciation schedules. Tax professionals can recommend strategies to balance credit claims while maximizing depreciation deductions, keeping your overall liability as low as possible.
All in all, tax professionals bring clarity and efficiency to a field that can quickly become overwhelming.
Energy credits can change the way property owners approach upgrades and sustainability. For real estate investors especially, these incentives are rewriting the rules on profitability and value.
Upgrading to clean energy solutions is not just a tax-saving move; it’s an investment in your real estate asset’s desirability and long-term performance.
Here’s how these improvements add value:
- Higher Appraisal Values: Other investors, potential buyers, and renters all see efficient properties as premium assets. A solar-powered roof, for example, improves operational efficiency and increases property value.
- Attractiveness to Eco-Conscious Buyers: Today’s real estate market includes many buyers who prioritize sustainability. Homes equipped with solar energy systems, for instance, often sell faster and at higher prices.
- Reduced Maintenance Costs: Solar power and efficient HVAC systems cut operating expenses, ensuring a better return on investment (ROI).
- Financial Security: In 2023, the Inflation Reduction Act also expanded the scope of credits like ITC, unlocking more opportunities for property investors. These enhancements don’t just save money, but make properties future-ready by focusing on sustainable infrastructure.
Efficient improvements don’t just benefit owners. They also make rental units more attractive to potential tenants for reasons like:
- Reduced utility bills
- Alignment with personal philosophies on sustainable energy
- Improved property reputation
Energy credits offer property owners a powerful tool to reduce tax liability and invest in long-term improvements that enhance value and efficiency. Whether you’re adding solar energy systems or pursuing efficient improvements, the opportunities to lower operating costs and increase tenant appeal are substantial. As you assess your next energy-efficient upgrade, you can consult with a CPA to determine if you are able to take energy credits on your investment properties.
Disclaimers: This article does not constitute legal or financial advice, real or implied. It’s always best to consult with a qualified CPA or tax professional to ensure complete compliance with all current laws and regulations.