Can You Take Residential Energy Credit on Rental Property?

No, you cannot claim a residential energy credit on rental property, and that answer holds two ways at once. The residential clean energy credit and the energy efficient home improvement credit were always limited to a dwelling the taxpayer used as a residence, which excluded pure rentals from the start. Both credits have also now ended for property placed in service after December 31, 2025, so even owner-occupied homes no longer qualify.¹² Landlords still have real tax tools for energy upgrades, but they run through depreciation and business-side credits, not the residential provisions.

Why Rentals Were Never Eligible

The residential energy credits were built around one gatekeeping rule: the improvement had to go into a home where the taxpayer actually lived. Section 25D defined every qualifying expenditure (solar electric, solar water heating, small wind, geothermal, battery storage) as one made in connection with “a dwelling unit located in the United States and used as a residence by the taxpayer.”³ Section 25C was even stricter for building envelope items like windows, doors, and insulation, requiring the dwelling to be “owned and used by the taxpayer as the taxpayer’s principal residence.”⁴

A single-family home rented under a lease, a condo on Airbnb the owner never occupies, a fourplex where the owner lives elsewhere: none of these met the residence test. The property was a business asset generating rental income, not the taxpayer’s home.

One narrow leftover exists on the residential side. If you claimed the Section 25D credit on your own home in a prior year and had unused credit exceeding your tax liability, that carryforward can still be applied on your 2026 return using Form 5695.⁵ It only helps taxpayers who installed qualifying equipment on their own residence before the cutoff and has no application to rental property.

How Landlords Recover Energy Upgrade Costs Instead

Because rental property is a business asset, energy improvements are recovered through depreciation. The method depends on what you installed.

Standard 27.5-Year Depreciation

Most major energy improvements to residential rental property (new windows, a roof, an HVAC system, even a solar array that becomes part of the building) are depreciated over 27.5 years using the straight-line method.⁶ A $30,000 set of energy-efficient windows generates roughly $1,091 in annual depreciation deductions spread over nearly three decades. The payoff is slow compared to a credit that hits your return in year one.

100% Bonus Depreciation

The One Big Beautiful Bill Act permanently restored 100% first-year bonus depreciation for qualifying property acquired after January 19, 2025.⁷ That is a big shift from the phaseout that had dropped the rate to 60% in 2024 and 40% in 2025.

The catch for residential landlords: qualified improvement property (which is eligible for bonus treatment) covers only improvements to the interior of nonresidential buildings. Residential rental buildings like apartment complexes are excluded from QIP treatment.⁸ Structural components of a rental house or apartment (windows, roofing, insulation, HVAC ductwork) still follow the 27.5-year schedule. Where bonus depreciation does help is with personal property used in the rental business: appliances, standalone equipment, and certain non-structural energy components. A standalone battery storage system or a portable generator could qualify for 100% first-year expensing.

Section 179 for Personal Property

Since 2018, rental owners have been able to use Section 179 to immediately expense personal property placed inside rental units, such as kitchen appliances, carpeting, and window treatments. Section 179 cannot be used for structural components like windows, roofs, or HVAC systems built into the building. It also cannot create a loss; your deduction is limited to net income from the rental activity plus any W-2 wages.

Business Energy Credits That Do Apply to Rentals

The residential credits are gone, but business-side energy credits remain and were never subject to the residence requirement. They are more complex to claim and often require professional certification, but on larger projects they deliver much bigger benefits than depreciation alone.

Clean Electricity Investment Credit (Section 48E)

For renewable energy installations on rental property (solar panels, small wind turbines, geothermal systems, battery storage), the Section 48E clean electricity investment credit is the business counterpart to the expired residential credit. It applies to energy property used in a trade or business, which includes rental real estate.⁹

The base rate is 6% of the cost of qualified energy property. A 30% rate is available for facilities with less than 1 megawatt of output, or for projects that meet prevailing wage and apprenticeship requirements during construction.⁹ Most residential-scale solar installations on rental property fall well under 1 megawatt, so landlords typically qualify for the full 30% rate without navigating the wage rules. A $40,000 solar array on a rental would generate a $12,000 business tax credit at that rate.

One trade-off: the depreciable basis of the energy property must be reduced by 50% of the credit you claim.¹⁰ On that same $40,000 array, a $12,000 credit drops your depreciable basis by $6,000, leaving $34,000 to depreciate. You still come out well ahead of depreciation alone, but the credit is not free.

The Section 48E credit for wind and solar facilities is currently set to expire for property placed in service after December 31, 2027.⁹ Given how quickly energy credit rules have moved, confirm current eligibility with a tax professional before committing to a large installation.

Section 179D Deduction for Larger Buildings

Landlords who own larger multi-family buildings may qualify for the Section 179D energy-efficient commercial buildings deduction, a direct deduction (not a credit) for the cost of qualifying energy-efficient property placed in service during the year.¹¹ It applies to multi-family residential buildings of four or more stories.¹²

To qualify, the improvements must achieve at least a 25% reduction in total annual energy and power costs compared to a reference building meeting ASHRAE Standard 90.1, and a licensed engineer or contractor must certify the savings using IRS-approved software.¹³

The deduction is calculated per square foot and adjusted for inflation each year. For 2025, the IRS published adjusted ranges of $0.58–$1.16 per square foot for the base deduction and $2.90–$5.81 per square foot for the enhanced deduction available to projects meeting prevailing wage and apprenticeship requirements.¹³ For a 50,000-square-foot apartment building at the enhanced rate, the deduction could exceed $250,000 in one tax year.

The Passive Activity Wall

This is where many rental owners hit an unexpected limit. Business energy credits claimed on rental property are generally subject to passive activity rules, because rental real estate is classified as a passive activity for most taxpayers. Credits generated by your rental typically can only offset tax on passive income, not W-2 wages or other active income.¹⁴

There is a partial exception. If you actively participate in managing the rental (decisions about tenants, repairs, and lease terms), you can use passive credits to offset tax on up to $25,000 of nonpassive income. That allowance phases out as adjusted gross income rises above $200,000 and disappears entirely at $250,000.¹⁴

The stronger workaround is qualifying as a real estate professional. If more than half of your working hours go into real estate activities and you log more than 750 hours per year in real estate trades or businesses where you materially participate, your rental activities are no longer passive.¹⁴ That unlocks full use of energy credits and depreciation deductions against any type of income.

Five-Year Recapture on Business Energy Credits

If you claim the Section 48E credit, plan to hold the energy property at least five years. If the property is sold, disposed of, or stops being used in a trade or business inside that window, part of the credit is clawed back. The recapture amount drops by 20% each year: 100% in year one, 80% in year two, and down to zero after year five.¹⁰

Selling a rental two years after installing a solar array and claiming a $12,000 credit would trigger recapture of $7,200. Converting the property from rental to personal use can also trigger recapture if the energy equipment stops being used in a business.

Which Forms to File

Carryforward of prior residential credits: Form 5695 (Residential Energy Credits). For 2026, this form is used only to apply carryforward amounts from installations completed before 2026.⁵
Section 48E investment tax credit: Form 3468 (Investment Credit), which feeds into the general business credit on Form 3800.¹⁵
Section 179D deduction: claimed directly on the tax return with supporting certification from a qualified engineer.
Depreciation: Form 4562 (Depreciation and Amortization), attached to Schedule E.

Landlords claiming business energy credits through a partnership or S corporation receive their share on Schedule K-1 and report it on their personal return. Passive activity limits still apply at the individual level regardless of the entity structure.

1
Internal Revenue Service. Residential Clean Energy Credit
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Internal Revenue Service. Energy Efficient Home Improvement Credit
3
Office of the Law Revision Counsel. 26 U.S. Code 25D – Residential Clean Energy Credit
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Office of the Law Revision Counsel. 26 U.S. Code 25C – Energy Efficient Home Improvement Credit
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Internal Revenue Service. Instructions for Form 5695 (2025)
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Internal Revenue Service. Depreciation and Recapture 4
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Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
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Doeren Mayhew. Expanded Bonus Depreciation for Qualified Improvement Property Under OBBBA
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Office of the Law Revision Counsel. 26 USC 48E – Clean Electricity Investment Credit
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Office of the Law Revision Counsel. 26 U.S. Code 50 – Other Special Rules
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Office of the Law Revision Counsel. 26 U.S. Code 179D – Energy Efficient Commercial Buildings Deduction
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Department of Energy. 179D Commercial Building Tax Deduction – Frequently Asked Questions
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Internal Revenue Service. Energy Efficient Commercial Buildings Deduction
14
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
15
Internal Revenue Service. Instructions for Form 3468