Solar Panels, Tax Incentives, and Your House
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Solar Panels,
Tax Incentives,
and Your House
By Jeffrey D. Moss
D
uring the summer of 2008, gas This article discusses the federal attachment of solar panels on a resi-
prices went through the roof, and state income and other tax credits dence or residential property has many
and the United States refocused available for various types of energy- advantages. First, sunlight is produced
on renewable energy. Americans say efficient improvements, with a primary free of charge, although not on a pre-
they desire energy independence from focus on tax credits available to residen- dictable basis (particularly in northern
foreign nations and environmentally tial homeowners using power gener- climates, as in Michigan). Nonetheless,
sound renewable energy sources. To ated by solar energy. To demonstrate solar energy production occurs during
that end, the federal and state govern- the various ways states are providing the daylight hours—the time of peak
ments have enacted a number of al- tax incentives that are in addition to the energy demand. Solar power not used
ternative energy laws, including the En- federal tax incentives, this article com- by a particular residence can be cheaply
ergy Improvement and Extension Act pares tax benefits available to families and quickly transferred into the power
of 2008, Pub. L. No. 110-343, div. B, 122 located in Canton, Michigan, Tallahas- grid through local interconnection de-
Stat. 3807 (codified in scattered sections see, Florida, and Raleigh, North Caro- vices that limit the need for huge capital
of 26 U.S.C.), which provides incentives lina. For example, some states provide expenditures for energy transmission
for alternative energy sources in homes tax rebates, some provide property tax to end users. Localized solar power has
and businesses, and the American credits for improvements, and others an advantage over commercial wind
Recovery and Reinvestment Act of 2009 promote the use of utility companies to power in ease of power transmission to
(ARRA), Pub. L. No. 111-5, 123 Stat. 115, provide the incentives for the genera- the end user.
which promotes the development and tion of alternative energy. One of the less attractive aspects of
use of renewable and alternative energy residential solar power is the require-
sources. Advantages and Disadvantages ment with most residential systems that
of Residential Photovoltaic a homeowner remain on the utility’s
Jeffrey D. Moss is a senior attorney Solar Power electricity grid. This makes stand-alone
in the Bloomfield, Michigan, office of The use of a photovoltaic system to capability highly unlikely in many
Corbis
Butzel Long. convert sunlight into electricity by the areas of the United States. In addition,
Probate & Property j January/February 2010 17the installation of solar panels on a solar electric property” in the 2008 properly allocable to on-site preparation,
residence requires a personal capital Energy Act provides one of the largest assembly, or original installation of the
expenditure rather than an expenditure incentives for the addition of qualified panels on the property and for the piping
funded by the government or a public solar energy property to a residence. In or wiring used to connect the property to
utility. Finally, although the installation 2009, the ARRA also extended the 30% the home.
of solar panels may add to a home’s credit to all eligible technologies (except It is also noteworthy that for the pur-
value, it also adds to a home’s main- fuel cells) placed in service after 2008. poses of this particular tax incentive, the
tenance and repair costs, complicates Before the 2008 Energy Act, a fam- residence does not have to be a primary
roof repairs, and increases insurance ily that spent $40,000 on qualified residence. Qualifying improvements can
costs. When the benefits and burdens solar electric property improvements be made to a vacation home and other
are weighed, however, residential use received only a $2,000 credit against dwelling units such as mobile homes,
of solar panels to produce electricity its federal income tax liability. Now, manufactured homes, and even certain
provides a net benefit both to the home with the cap on the annual limit lifted, houseboats. IRC § 25D(d)(2) (qualified
owner and to the utility. Encouraging solar electric property expenditures may
solar panel use will reduce reliance on be made on any dwelling unit used as a
fossil fuels as an energy source. “residence”). In contrast, IRC § 25D(d)(3),
When the benefits and related to “Qualified Fuel Cell Property
The Federal Residential Energy
Efficient Property Tax Credit burdens are weighed, Expenditures,” contains more limited
language allowing the fuel cell credit only
In 2008, Congress enacted multiple leg- residential use of solar for a dwelling unit used as a “principal
islative acts comprehensively called the panels to produce residence.” Clearly, Congress intended the
Emergency Economic Stabilization— Solar Energy Tax Credits for solar prop-
Energy Improvement and Exten- electricity provides a erty expenses to apply more expansively
sion—Tax Extenders and Alternative net benefit both to the than the credits for fuel cell expenditures.
Minimum Tax Relief Acts of 2008 (2008 There are even specific IRC sections
Economic Stabilization Act), Pub. L. No.
homeowner and to permitting the pro rata allocation of REEP
110-343, 122 Stat. 3765. An act called the the utility. credits to owners of cooperative housing
Energy Improvement and Extension corporations and condominium associa-
Act of 2008 (2008 Energy Act), enacted tions. See IRC § 25D(e)(5) (cooperatives)
on October 3, 2008, forms division B of and IRC § 25D(e)(6) (condominiums). The
the 2008 Economic Stabilization Act. that same family can obtain a credit in 2008 Energy Act also eliminated the provi-
The major component of the 2008 the amount of $12,000 against their tax sion that previously denied the credit to
Energy Act, as it relates to solar power, bill, based on a $40,000 expenditure. owners of property purchased or financed
is the long-term extension and ben- This is a tax credit and not a deduction. by subsidized energy financing. See IRC
eficial modification of the Residential A deduction of $12,000 would lower § 48(a)(4)(C). Even if the government cre-
Energy Efficient Property Tax Credit taxable income by $12,000 and produce ates a financing program for residential
(REEP). 2008 Energy Act § 106. The tax savings of only $3,360 at the 28% solar panels, the REEP credit should be
REEP was scheduled to expire at the bracket. In contrast, a $12,000 credit is a available.
end of 2008, but the 2008 Energy Act ex- dollar-for-dollar credit against the tax a If a taxpayer claims the REEP credit, the
tended the REEP credit through the end homeowner would otherwise pay and taxpayer is required to reduce the basis of
of calendar year 2016. The 2008 Energy is nearly four times more valuable. the home by the amount of the tax credits
Act also removed the cap on the avail- What expenses qualify for the federal allowed. This is presumably designed
able credit and expanded the REEP. REEP credit? IRC § 25D(d)(2) defines to subject a homeowner to potential tax
Before the 2008 Energy Act, an individ- the term “Qualified Solar Electric Prop- in the future to offset the immediate tax
ual homeowner was allowed an annual erty Expenditure” as “an expenditure benefits received. Reducing the basis of a
credit for the purchase of “residential for property which uses solar energy to primary residence does not have a nega-
energy efficient property” equal to the generate electricity for use in a dwelling tive effect, however, because currently
sum of 30% of the amount paid for a unit located in the United States and the IRC does not provide for recapture
“qualified solar energy property,” with used as a residence by the taxpayer.” if one sells a primary residence and fits
a maximum credit of only $2,000. See IRC § 25. The term “Qualified Solar within the exclusion of gain on the sale
Internal Revenue Code § 25D(b)(1). For Electric Property Expenditures” also of a principal residence under IRC § 121.
tax years beginning after December 31, includes costs incurred for solar panels The sale of second homes and vacation
2008, the 2008 Energy Act removes the and other property installed as a roof properties could be negatively affected by
$2,000 limitation on the credit allowed or a portion of a roof. This includes the reduction in basis because IRC § 121
in a tax year for “qualified solar electric the acquisition of solar panels used in excludes recognition of gain only on the
property expenditures.” Now the 30% photovoltaic systems. Further, IRC sale of qualified personal residences, not
credit is unlimited. Id. The elimination § 25D(e)(1) defines “Qualified Solar on the sale of second homes.
of the cap on the credit for “qualified Electric Property” as labor costs Residential energy tax credits should
18 Probate & Property j January/February 2010be claimed on IRS Form 5695. On the tax system installed in a residential struc- Property,” in June 2008 to provide prop-
form, a homeowner also can claim federal ture is $20,000. A commercial structure erty tax relief to those who install ap-
tax credits for other qualified energy- can obtain a rebate of up to $100,000. proved energy-efficient improvements.
efficient improvements such as insulation, Initially, a qualifying solar energy Fla. Stat. § 196.175 et seq. Normally, a
exterior windows (including certain storm system must be one of the following municipality is permitted to tax real
windows and skylights), exterior doors (in- types of systems: property located in its jurisdiction at its
cluding certain storm doors), certain quali- fair market value, including the value of
fied metal roofs designed to reduce heat • a “solar photovoltaic system” that improvements. This new exemption al-
gain of a home, and certain efficient heat produces at least two kilowatts, or lows the property owner to exclude the
pumps, water heaters, air conditioners, fur- • a “solar thermal system” that pro- value of the renewable energy improve-
naces, and fans. Also, if the taxpayer’s solar vides at least 50% of a building’s ments, including the cost of the device
powered system is designed to heat the hot water consumption, or and the installation cost. The exemption
water in the home in the permitted manner, • a “solar thermal pool heater.” does not include the cost of removing
the taxpayer can receive a qualified solar or improving other existing property in
water heating property tax credit. A solar photovoltaic system qualifies the course of the installation. This real
for a rebate if property tax exemption means that a
The Interplay of State and Local homeowner will not be taxed on the
Tax Credits Related to Solar • the system is installed by a state- increase in property value caused by the
Power and Renewable Energy licensed master electrician, electri- installation of these qualified renewable
Sources cal contractor, or solar contractor; energy improvements for a period of 10
State legislatures have taken several differ- • the system complies with the years after the improvement has been
ent approaches to encourage investment in state interconnection standards placed in service.
environmentally friendly improvements. as provided by the Florida Public The statute defines a “renewable en-
The following discussion analyzes several Service Commission; and ergy source device” as any equipment
of these approaches, focusing on the tax • the system complies with all that, “when installed in connection
benefits to a hypothetical family of two applicable building codes as with a dwelling unit or other structure,
adults and two children with a combined defined by the local jurisdictional collects, transmits, stores, or uses solar
household income of $120,000. The hypo- authority. energy, wind energy, or energy derived
thetical assumes that the family’s marginal from geothermal deposits.” This list
federal income tax rate is 28% and they The rebate amount for a solar pho- includes:
own a primary residence worth $300,000, tovoltaic system is set at $4 per watt
subject to a mortgage balance of $180,000. based on the total wattage rating of the solar energy collectors; storage tanks
The family desires to add solar panels system, and the application for a rebate and other storage systems, exclud-
or structures containing solar panels at a must be made within 120 days after the ing swimming pools used as storage
cost of $40,000. The proposed solar panel purchase of the solar energy equip- tanks; rockbeds; thermostats and
system would contain a surface area of ment. The total wattage rating of the other control devices; heat exchange
approximately 300 square feet of solar system is determined by the National devices; pumps and fans; roof ponds;
panels and would generate three kilowatts Renewable Energy Laboratory Solar freestanding thermal containers;
of power. A system of this size would likely Calculator. Thus, assuming that the pipes, ducts, refrigerant handling
supplement power generated from other hypothetical family installed a solar systems, and other equipment used
sources and would still require connection photovoltaic three kilowatt system, to interconnect such systems [how-
to a power grid, but could produce 50% to that system would generate a $12,000 ever, conventional backup systems
75% of a family’s power needs. rebate. of any type are not included in this
This rebate program has been so definition]; windmills; wind-driven
Florida Solar Energy Tax Incentives popular that the state of Florida has generators; power conditioning and
The state of Florida currently has a very exhausted its budget on an annual basis storage devices that use wind energy
successful solar energy system incentives through the 2008–09 year. Applications to generate electricity or mechani-
program created in 2006 by the Florida received and approved are placed on cal forms of energy; pipes and other
Renewable Energy Technologies and a waiting list for funding and future equipment used to transmit hot
Energy Efficiency Act, Fla. Stat. § 377.801 use. The state of Florida does not have geothermal water to a dwelling or
et seq. This initial program was structured a state income tax. As a result, this structure from a geothermal deposit.
as a four-year program and permits any program is a rebate rather than a tax
household or business that installs a quali- credit, making it even more valuable to Fla. Stat. § 196.012(14).
fied “solar energy system” between July 1, Floridians. In addition to the Florida incentives
2006, and June 30, 2010, to obtain a rebate In addition to the rebate, Florida to homeowners for the production
of a portion of the purchase price of the passed a real estate property tax of energy from solar power and the
system. Fla. Stat. § 377.806. The maximum exemption, the “Renewable Energy property tax exemption, the state also
allowable rebate for a solar photovoltaic Property Tax Exemption for Residential exempts the purchase of a “solar energy
Probate & Property j January/February 2010 19system” from Florida’s 6% sales tax. Id. calculated at 35% of $40,000, which re- who generate 20 kilowatts or less, a “modi-
§ 212.08. This sales tax exemption cov- sults in a $14,000 tax credit. Because of fied” net metering concept will occur when
ers the equipment and hardware used the $10,500 limitation, the family would “net excess generation during a billing
for collecting, transferring, converting, be permitted to claim $10,500 as a state period may be carried to the next billing
storing, or using incidental solar energy of North Carolina tax credit. period at either the monthly average real
for water heating, space heating and Because the North Carolina mar- time marginal price or the utilities retail
cooling, or other applications. On a ginal state income tax rate is 7.75% for rate.” Customers who generate more than
$40,000 purchase, this sales tax exemp- income over $60,000, the North Caro- 20 kilowatts will be eligible for true net
tion would result in an additional lina family in the example would owe metering in the sense that the power they
$2,400 saving. up to $9,300 in state income tax in a generate and the power they use will offset
The City of Tallahassee Utility Sys- year. Because of the 50% limitation on a each other in real time. In any given month,
tem also offers loans direct to consum- taxpayer’s liability on the annual allow- the customer will be charged only with net
ers to acquire energy-saving measures, able credit and the carryover provisions use. A customer who generates electricity
including photovoltaic systems and for the Renewable Energy Tax Credit, in excess of use will receive a credit back
solar water heating systems. Under the the family could receive a credit of from the utility company. Thus, Michigan’s
program, a homeowner can borrow $4,650 for two years and $1,200 for the current contemplated proposal provides
up to $20,000 directly from the city for third year, until they received the entire incentives through the utility companies
a photovoltaic system at a 5% interest $10,500 tax credit benefit. As previously and not the tax system.
rate. Although these loans do not cover noted, a credit against income taxes Michigan does have a limited renewable
the entire cost of the photovoltaic sys- otherwise owed is particularly benefi- energy rebate for photovoltaic systems that
tem, both the rate and amount of these cial, more valuable than a deduction of are rack mounted or building integrated
loans show that the city is serious about an equal amount. and rated at 20 kilowatts or less. The $3 per
promoting the acquisition of solar en- In August 2008, North Carolina kilowatt rebate, however, is currently avail-
ergy systems for homeowners. enacted a real estate property tax ex- able only to those customers who receive
In summary, the state of Florida, emption equal to 80% of the appraised utility service through Wisconsin Public
likely because of its warmer weather value attributed to the addition of a Power in the Upper Peninsula.
and higher use of air-conditioning, photovoltaic solar energy system to It is somewhat ironic that a state with
has one of the most progressive state- a residence. N.C. Stat. § 105-275(45). less sunlight would have lower rebates and
funded incentives for the production Compared to Florida, a homeowner incentives for solar energy improvements.
and use of solar power in personal in North Carolina would see a slight If Michigan intends to increase its solar
residences. increase in property tax because of the use, it would likely have to provide greater
improvements to the residence made incentives than Florida because the likeli-
North Carolina Solar by the installation of a solar photovol- hood of economic recapture in Michigan is
Energy Tax Credits taic energy electric system, rather than less than in Florida.
The state of North Carolina has a per- a full increase. The definition in the Perhaps Michigan will, in the near
sonal tax credit called the “Renewable North Carolina property tax abatement future, become a leader in promoting resi-
Energy Tax Credit,” which is a credit for a solar energy electric system is “all dential solar energy tax credits. At present,
against the state income tax. Renew- equipment used directly and exclu- Michigan has not enacted any particular
able Energy Tax Credit, N.C. Gen. Stat. sively for the conversion of solar energy incentive to encourage homeowners to
§ 105-129.16A et seq. The maximum to electricity.” Id. purchase solar panels for their homes.
permissible tax credit is 35% of the cost
Michigan Solar Energy Tax Credits Other Potential Financing Sources
of eligible renewable energy property
and Alternatives to Tax Credits
constructed, purchased, or leased by The state of Michigan has taken a dif-
the taxpayer and placed in service in ferent approach to creating the financial Home Equity
North Carolina during the year. The incentives for generating renewable Because many qualified solar energy
maximum permissible tax credit for a power. In October 2008, Michigan en- improvements are actually improvements
photovoltaic solar system (and wind acted a statewide net metering program to homes or to real property, the likeli-
energy system for residential use) is for renewable energy systems. Clean, hood is high that homeowners will be
$10,500 per installation. The allow- Renewable, and Efficient Energy Act, able to obtain home equity financing or
able credit may not exceed 50% of the Mich. Comp. Laws §§ 460.1001–1195. other qualified financing secured by the
taxpayer’s tax liability in a year and the On May 26, 2009, the Michigan Pub- value of the improvements. The separate
credit may be carried forward for five lic Service Commission issued an structure proposed in this article is similar
years if not fully absorbed in the initial order formally adopting revised net to a garage, shed, or other home improve-
years. Thus, if the sample homeowner metering rules. Mich. Admin. Code r. ment that adds value to a home and would
family installed a $40,000 photovol- 460.601–656. The net metering practice qualify the taxpayer for deductible interest
taic solar system in their home, the will be divided into two categories for as qualified home equity indebtedness,
potential tax credit initially would be residential customers. For customers under IRC § 163(h)(3)(A)(ii).
20 Probate & Property j January/February 2010Financing by Utilities companies are also offering alternative made to photovoltaic panels, heating
It is possible that states such as Michigan arrangements in which the homeowner systems, transmission systems, and
have not yet integrated their tax rebate and owns the system and enters into a pow- storage systems, the use of solar power
incentive programs to fund solar energy er purchasing agreement for a fixed by homeowners should increase even
because they are relying on the utility period of time. A long-term power in areas without optimal sunshine. The
systems to provide financing for residential purchase agreement helps to ensure a tax incentive programs should result
solar systems. As the date for the renew- market for the energy produced. in greater sales of equipment relating
able portfolio standards (RPS) gets closer, to the production of solar energy and,
Conclusion in turn, result in more improvements
utilities will be required to purchase power
from third parties and homeowners to The use of residential solar power ap- and less cost per unit, not unlike that
meet the state-mandated standards. To pears to be a “win-win” for homeown- experienced for computers and other
produce a sufficient amount of solar power ers, utility companies, and the environ- electronic equipment. n
for a utility to purchase, the utility also will ment. As improvements continue to be
be required to subsidize the acquisition of
residential photovoltaic systems so as to so-
lidify the source of energy it must produce
or acquire.
The expansion of utility subsidies for
improvements will definitely enhance the
development of qualified solar power for
residential use in Michigan. In September
2009 DTE Energy announced that first
phase of a program called “SolarCurrents”
for residential and commercial uses, which
combines an element of partial reimburse-
ment for the acquisition and installation
of solar energy systems in the amount
of $2.40 per direct current watt with a
production rebate in the amount of $0.11
per kilowatt. Press Release, DTE Energy
Company, New Detroit Edison Program Will
Enable Customers to Cut the Cost of Install-
ing Solar Energy (Sept. 1, 2009), available at
http://dteenergy.mediaroom.com/index.
php?s=43&item=433. The acquisition of
the three-kilowatt system proposed for
the family in this article would create a
payment of $7,200 from DTE Energy plus
production credits in the future.
DTE Energy is treating the up-front
rebate as a prepayment for renewal energy
credits (RECs) and the production incen-
tive as payment for marginal increases in
renewable source energy. In other words,
DTE Energy is paying customers to pro-
duce renewable energy and purchasing the
RECs to satisfy its RPS requirement.
Leasing and Power
Purchaser Agreements
In addition to utility-funded financing, new
third-party players are entering various
markets and offering residential homeown-
ers the opportunity to lease solar panels
and solar energy systems, with the result-
ing RECs belonging to the leasing com-
pany rather than the homeowner. These
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