The Investment Tax Credit (ITC)
Solar energy property placed in service on a rental qualifies for the Investment Tax Credit (ITC) under IRC Section 48 — currently 30% of the cost, as restored and expanded by the Inflation Reduction Act of 2022. On a $30,000 solar installation, the credit is $9,000 directly offsetting your tax liability.
The ITC is a credit, not a deduction — it reduces your tax dollar for dollar. However, it is subject to passive activity rules. If the rental is a passive activity and you have no passive income to absorb it, the credit carries forward to future years when you have passive income or the activity is disposed of.
Depreciation: 5-year MACRS plus bonus
Solar equipment is classified as 5-year MACRS property, not 27.5-year real property. A $30,000 solar installation (reduced by half of the ITC, or $25,500 depreciable basis after the 50% ITC adjustment rule under IRC 50(c)) qualifies for bonus depreciation in the year placed in service.
With 40% bonus depreciation in 2025, the first-year deduction on the adjusted $25,500 basis is $10,200, with the remaining $15,300 depreciated over years two through six. Combined with the $9,000 ITC, the total first-year tax benefit on a $30,000 solar system can exceed $15,000 for an investor in the 37% bracket.
Passive activity limitations
Both the depreciation deduction and the ITC flow through to your return with passive activity limitations if the rental is passive. The depreciation becomes a passive loss (potentially limited), and the ITC is a passive activity credit (limited to tax on passive income).
Investors with real estate professional status or active short-term rentals can use both without limitation against ordinary income. Others may need to carry the credit and losses forward or plan around passive income sources.
Frequently asked questions
Is the ITC available for rental property solar?
Yes — the 30% ITC under IRC Section 48 applies to solar installed on investment and rental properties. Passive activity rules may limit when you can use it.
Does the depreciable basis need to be reduced for the ITC?
Yes. Under IRC 50(c), the depreciable basis is reduced by 50% of the ITC. On a $30,000 system with a $9,000 credit, the depreciable basis is $30,000 − ($9,000 × 50%) = $25,500.
Can I claim both the ITC and depreciation?
Yes — they are complementary, though the basis reduction rule means you cannot claim the full ITC and depreciate the full cost.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.