Can You Take Residential Energy Credit on Rental Property?
Learn how the residential energy credit applies to rental properties, including eligibility requirements, usage considerations, and necessary documentation.
Tax credits can make energy-efficient home improvements more affordable, but not all properties qualify the same way. The Residential Energy Credit encourages homeowners to invest in renewable energy and efficiency upgrades, potentially reducing their tax burden. However, eligibility for rental properties depends on how they are used.
Determining whether you can claim this credit requires understanding factors like personal versus rental use and the types of qualifying improvements.
Criteria for Claiming This Credit
Eligibility depends on property type, improvements made, and how the credit applies under tax law. Governed by Internal Revenue Code Section 25D, the credit primarily benefits homeowners who install renewable energy systems, such as solar panels or geothermal heat pumps, in their primary or secondary residences. Unlike deductions, which lower taxable income, this credit directly offsets tax liability.
To qualify, you must own the property where the improvements are installed. Renters are not eligible, even if they pay for upgrades. The credit is nonrefundable, meaning it can reduce your tax bill to zero but will not generate a refund beyond your total tax liability. Any unused portion can typically be carried forward to future tax years.
Rental vs. Personal Use Allocation
Claiming the Residential Energy Credit for a rental property depends on how the property is used. The IRS distinguishes between personal and rental use, which affects eligibility. If a property is used exclusively as a rental, the credit does not apply, as the IRS classifies it as a business asset. However, if you use the property personally for part of the year, you may claim a portion of the credit based on the time it is used as a residence.
A property qualifies as a personal residence if you use it for personal purposes for more than 14 days or more than 10% of the total days it is rented at fair market value, whichever is greater. If it meets this threshold, the percentage of time used as a personal residence determines the portion of qualifying improvements eligible for the credit. For example, if you live in the home for three months and rent it for nine, only 25% of the improvement costs may qualify. The rest is treated as a rental expense, which may be depreciated over time instead of receiving an immediate tax credit.
Keeping records is necessary to substantiate the allocation between personal and rental use. The IRS may request lease agreements, utility bills, or occupancy records to verify personal use. If the property is rented to family members at below-market rates, those rental days may be classified as personal use, further limiting eligibility.
Qualifying Property Improvements
Energy-efficient upgrades must meet specific criteria to qualify. Eligible improvements generally fall into two categories: renewable energy systems and energy-efficient home enhancements. Renewable energy installations include solar electric systems, solar water heaters, small wind turbines, fuel cells, and geothermal heat pumps. These systems must meet certification standards set by the U.S. Department of Energy and be installed in a qualifying U.S. residence.
For solar energy systems, the panels and equipment must be new, not previously used or repurposed. Installation must be completed by a licensed professional to ensure compliance with safety and efficiency standards. Homeowners can claim 30% of the total cost, including labor, equipment, and necessary wiring, with no upper limit on the amount claimed in 2024.
Geothermal heat pumps must meet ENERGY STAR® requirements. These systems provide heating and cooling by transferring heat between the home and the ground, reducing reliance on traditional HVAC systems. The credit applies to both the cost of the system and installation, provided it serves a residential property. Wind turbines and fuel cells also qualify, but fuel cell installations are subject to additional conditions, including a per-kilowatt capacity limit and a requirement that the home is the taxpayer’s primary residence.
Documentation for Filing
Proper documentation is necessary to claim the Residential Energy Credit and ensure compliance with IRS requirements. Taxpayers must maintain detailed records of expenses related to qualifying improvements, including itemized receipts, manufacturer certifications, and contractor agreements. These documents should state the purchase date, installation date, and a description of the energy-efficient property installed. Incomplete or vague records may lead to disallowed claims in an IRS audit.
IRS Form 5695, Residential Energy Credits, must be completed and attached to your federal tax return. This form requires details about the type of qualifying property, total expenses incurred, and the percentage allowed under current tax provisions. Accuracy is essential, as errors could trigger scrutiny or delays. If the credit exceeds your tax liability, any unused portion should be documented for carryforward purposes to ensure proper application in future tax years.