Qualified Solar Electric Property Costs: What Expenses Can You Claim?

Installing solar panels is a significant investment, but tax incentives help offset the cost. The federal residential clean energy credit allows homeowners to claim a percentage of qualified solar electric property costs, reducing their tax liability. However, not all expenses related to installation qualify.

Understanding which costs are eligible and how to claim them ensures homeowners maximize savings while complying with IRS rules.

Basic Eligibility Criteria

To qualify for the federal residential clean energy credit, the solar electric system must be installed on a property owned by the taxpayer and used as a residence. This includes primary homes, vacation properties, and even mobile homes or houseboats, as long as they meet the IRS definition of a dwelling unit. Rental properties do not qualify unless the owner also lives in the home for part of the year.

The system must be new and operational by December 31 of the tax year in which the credit is claimed. If installation spans multiple years, the credit is typically claimed in the year the system becomes functional.

Only solar electric systems qualify. Solar water heating systems fall under a different tax credit. The equipment must comply with fire and electrical codes to ensure safety and performance.

Qualified Installation Expenses

The credit covers costs directly related to purchasing and installing a solar electric system. This includes solar panels, inverters, mounting hardware, and wiring necessary to connect the system to a home’s electrical infrastructure. Labor costs for site preparation, assembly, and installation also qualify, as do permitting fees. If structural upgrades, such as roof reinforcements, are required to support the system, those expenses may be included if directly related to the solar installation.

Battery storage systems that integrate with the solar array are eligible if they have a minimum capacity of 3 kilowatt-hours (kWh). If a battery is installed in a later year but is charged exclusively by the solar system, it remains eligible for the credit in the year it becomes operational.

Non-Qualifying Items

Not all expenses associated with a solar installation qualify for the credit. General home improvements, such as replacing an old roof or upgrading electrical wiring beyond what is necessary for the solar system, are not eligible. The IRS only allows costs directly tied to the solar array’s functionality.

Financing costs, including loan interest, origination fees, and credit check costs, do not qualify. Extended warranties beyond the manufacturer’s standard coverage are also excluded.

State or local incentives can affect the credit amount. If a homeowner receives a rebate that directly reduces the system’s purchase price, the credit must be calculated based on the net cost after applying the rebate. However, state tax credits or performance-based incentives, such as Solar Renewable Energy Certificates (SRECs), do not reduce the federal credit.

Claiming the Credit

The credit is claimed using IRS Form 5695. Unlike deductions, which reduce taxable income, this credit directly offsets tax liability. If the credit exceeds the total tax owed for the year, the remaining amount carries forward to future years.

The credit must be claimed in the tax year when the solar system is placed in service, meaning it must be fully installed and operational. Systems installed late in the year should have all necessary approvals and grid connections completed before December 31 to avoid delaying the credit to the following tax year.

Documentation and Proof

Proper documentation is necessary to support the expenses claimed. The IRS may request proof that the solar system was purchased, installed, and operational during the tax year in question.

Receipts and invoices from the solar provider should clearly itemize equipment, labor, and associated fees. Contracts with the installation company should be retained to confirm the project timeline and that the system was installed on an eligible residence. If the system was financed, loan agreements and payment records help verify expenses. Permits and inspection approvals demonstrate compliance with local building codes and confirm the system was operational by year-end.

Utility bills showing net metering credits or energy production data can further support a claim. While not explicitly required when filing, these records provide additional evidence that the system was functional. Taxpayers should store all relevant documents for at least three years after claiming the credit, aligning with the IRS audit window.

Special Rules for Rental Property

Homeowners who rent out their property face additional restrictions. The credit is generally not available for systems installed on properties used exclusively as rentals. However, if the homeowner resides in the property for part of the year, a portion of the credit may still be available.

For mixed-use properties, the credit must be prorated based on the percentage of time the homeowner occupies the residence. For example, if a taxpayer lives in the home for six months and rents it out for the other six months, only 50% of the total qualified solar expenses can be claimed. Homeowners should maintain records demonstrating their occupancy, such as utility bills or official correspondence listing the property as their primary address, in case of IRS scrutiny.

If a rental property does not qualify for the residential clean energy credit, owners may still explore alternative tax benefits. Depreciation deductions under the Modified Accelerated Cost Recovery System (MACRS) allow landlords to recover the cost of a solar installation over time, often in combination with the federal Investment Tax Credit (ITC) for commercial solar projects. These incentives operate under different tax rules, so rental property owners should consult a tax professional to determine the best approach for their situation.