Tax on Solar Energy: Federal Credit, State Breaks, and Resale Basis

The tax on solar energy runs in two directions for homeowners: the federal government cuts your tax bill by 30% of what a qualifying system costs, and some ongoing solar income is taxable while other utility credits are not. States pile on their own property and sales tax breaks. The federal residential clean energy credit has no dollar cap and applies to systems placed in service from 2022 through 2032.¹

The 30% Federal Solar Tax Credit

The residential clean energy credit under Section 25D of the Internal Revenue Code is a dollar-for-dollar reduction of your federal tax bill equal to 30% of what you spend on a qualifying solar energy system.² A credit is not a deduction; it comes off the tax you owe, not off your taxable income. Spend $30,000 on an installation and the credit is $9,000.

There is no annual or lifetime cap on the amount.¹ The 30% rate holds for systems placed in service between 2022 and 2032, then steps down before ending. The Inflation Reduction Act of 2022 set the current rate and timeline.

Who Qualifies and Which Costs Count

You have to own the equipment. Leased panels and power purchase agreements put the tax benefit with the company that owns the hardware, not with you. The system must sit on a home in the United States that you use as a residence, which can include a second home you spend time in during the year.² A rental property you don’t live in is not eligible under Section 25D.

The equipment must be new. Eligible costs include the panels, inverters, mounting hardware, wiring, and professional installation labor.² Roof repairs required only because of the solar install can be counted; general roof work you would have done anyway cannot.

Standalone home batteries qualify too, starting in 2023, at the same 30% rate. The battery needs at least 3 kilowatt-hours of capacity and must be installed at a home you use as a residence.² They no longer have to be charged only from your solar array.

Utility rebates reduce your eligible cost. If a utility gives you a $2,000 rebate on a $30,000 install, you calculate the credit on $28,000, which yields $8,400 rather than $9,000. The rebate itself is generally not taxable income; it just lowers the purchase price for credit purposes.

Claiming the Credit on Your Return

File IRS Form 5695, Residential Energy Credits, with your annual return. The form has a dedicated line for qualified solar electric property costs where you enter your total eligible spending.³ The calculated credit flows to Schedule 3 of Form 1040, line 5a.⁴

Keep the paperwork. That means installer invoices that break out panels, inverters, mounting, and labor; proof of the date the system was completed and became operational, which the IRS calls the “placed in service” date; and the contract showing total project cost. The IRS treats costs as paid when the original installation is complete.⁵ A system finished in December counts for that year even if you didn’t turn it on until January.

If the Credit Is Bigger Than Your Tax Bill

A $9,000 credit does not directly help if you only owe $5,000 in federal tax. The credit is nonrefundable, so it can bring your bill to zero but the IRS will not send you a check for the difference. What remains carries forward indefinitely to future returns until you have used it all.²⁶ Homeowners with consistently low tax liability may need several years to capture the full benefit.

When Solar Generates Taxable Income

Owning solar can produce income, and the IRS treats different types differently.

Solar Renewable Energy Certificates

Some states require utilities to source a share of their electricity from renewables, and utilities buy Solar Renewable Energy Certificates from solar owners to prove compliance. If you sell SRECs, the proceeds are taxable gross income. The IRS has addressed this in private letter rulings, requiring taxpayers to report the gain under Section 61(a), the same broad provision that covers wages and investment gains.⁷ The amount you receive goes on your return like other income.

Net Metering Credits

Net metering works differently. When your panels send more power to the grid than your home uses, the utility credits your bill. The IRS has said net metering credits do not affect your qualified expenses for the solar tax credit.⁸ They are generally treated as a reduction in your utility cost rather than as income, closer to a volume discount than a payment for services. The IRS has not issued formal published guidance covering every scenario, so homeowners who receive unusually large cash payments from their utility, rather than bill credits, should check with a tax professional.

State Property and Sales Tax Breaks

Most states add their own incentives on top of the federal credit, and you can claim both. They fall into two main groups.

Property Tax Exclusions

Adding solar panels raises your home’s market value, which would normally raise your property tax. A majority of states block that increase by excluding the value of solar equipment from your assessment. Some states apply the exclusion automatically at reassessment; others require a form filed with the local assessor. Duration varies by state, from protection for the life of the system to time-limited exemptions with sunset dates.

Sales Tax Exemptions

Many states exempt solar equipment and installation labor from state sales tax. In states with rates of 6% to 8%, that can shave several thousand dollars off a residential install. Some exemptions cap eligible system size; others apply regardless of capacity. The exemption is usually applied at purchase and reflected in the contract price, so you generally do not need to claim a refund afterward.

Solar and Your Home’s Cost Basis at Sale

When you sell your home, solar shows up in one more tax calculation. Home improvements raise your cost basis, the figure the IRS uses to compute taxable gain on a sale. Solar counts as an improvement, so what you spent gets added to your basis. The federal credit reduces that addition. Spend $30,000 and claim a $9,000 credit, and only $21,000 goes into your basis.⁹ For most primary homes, the capital gains exclusion ($250,000 single, $500,000 married filing jointly) makes this a nonissue, but it matters if your gain is large or if the property is a second home.

A Note on Rental and Commercial Property

Section 25D is a homeowner rule. Landlords and businesses claim a different credit under Section 48 or the newer Section 48E clean electricity investment credit, and for solar property Section 48E does not apply after December 31, 2027.¹⁰ If your panels are going on a property you don’t live in, you are in a different part of the tax code with a tighter deadline.

1
Internal Revenue Service. Installing Solar Panels or Making Other Home Improvements May Qualify Taxpayers for Home Energy Credits
2
Office of the Law Revision Counsel. 26 USC 25D – Residential Clean Energy Credit
3
Internal Revenue Service. Form 5695 – Residential Energy Credits
4
Internal Revenue Service. Schedule 3 Form 1040 Additional Credits and Payments
5
Internal Revenue Service. Instructions for Form 5695 – Residential Energy Credits
6
Congress.gov. Expiration and Carryforward Rules for the Residential Clean Energy Credit
7
Internal Revenue Service. Private Letter Ruling 201035003
8
Internal Revenue Service. Residential Clean Energy Credit
9
Internal Revenue Service. Publication 523 (2025), Selling Your Home
10
Office of the Law Revision Counsel. 26 USC 48E – Clean Electricity Investment Credit