solar and rental properties

[BORN SAVER]

Do any of you guys use solar on your retail properties? solar ROI is ruffly 7 years on average if it was just on your residential home. The idea I was playing with was use one of the company that design your solar system and send you the parts and you install it your self. So the ROI would be even lower then that potentially hopefully 3-5 years. I haven't priced this out yet just spit balling. As far as the installation goes it should be cake I installed/ ran crews for tesla for 5 years.

My thoughts on doing this are:
1. It could possibly be a good marketing point that its clean energy
2. you could bump up your rent ruffly 80-100% of the energy savings to the tenet.
3. If for some reason your property was vacant for a period of time your not paying the utility for the most part.
4. also I  would be buying the system in cash no loans or ppa program just buy and install and get returns.

Whats your thoughts? let me know.

[Dicey]

Love me some ruffly rent, especially when paired with stiletto heels...

[uniwelder]

I’ve thought about it, but always wondered whether tenants would value the savings vs contemplating the higher rent. I’m curious to hear from others.

In prior years (I don’t think anything changed in the recent legislation) solar on an investment property was excluded from the tax credit, although it’s available for a business. Classifying as a business would increase the return significantly, besides the diy aspect. I’d like to understand what it takes to classify a rental property as a business.

[oneday]

I rented a place that had solar, it was one of the things that was appealing about the place.

In that case we paid the electric bill, the LL did not have an opportunity to pocket the difference. After that experience, I think it would irk me to have a LL try to do that. Aren't points 1 & 3 enough incentive for the LL?

[uniwelder]

I rented a place that had solar, it was one of the things that was appealing about the place.

In that case we paid the electric bill, the LL did not have an opportunity to pocket the difference. After that experience, I think it would irk me to have a LL try to do that. Aren't points 1 & 3 enough incentive for the LL?

If the place didn't have solar, would it have been worth the same amount in rent to you?  Would you have chosen to rent somewhere else instead?  You're suggesting the rent for the place you lived in was the same as other comparable places that didn't have solar, which could certainly be true.  In that case, your landlord had priced the place below market value.

As a landlord, it would irk me to have installed a feature that is worth 20-30k (nice deck, pool, fancy kitchen, or solar panels), attract tenants that specifically like that feature, but then have them argue about the price of rent when comparing it to another place that doesn't have that upgrade.

[oneday]

If the place didn't have solar, would it have been worth the same amount in rent to you?

Yes. I live in an extremely competitive market. The shittiest hell hole goes for multiple thousands of dollars, and is snapped up so fast your head would spin. Utilities cost does not factor into the decision, when the place could be rented out, sight unseen to someone with a tech salary, before you pull out of the driveway after a viewing.

Having solar was like if the kitchen sink had a disposal or the front yard was landscaped and watered on the LL's dime. Nice to have, but does not in any way drive the decision to apply.

[bacchi]

In prior years (I don’t think anything changed in the recent legislation) solar on an investment property was excluded from the tax credit, although it’s available for a business. Classifying as a business would increase the return significantly, besides the diy aspect. I’d like to understand what it takes to classify a rental property as a business.

It's a capital improvement on a rental property. It depreciates over 5 years.

SO's parents added solar to all of their rentals. There is rarely a kwh charge on the bills.

[uniwelder]

In prior years (I don’t think anything changed in the recent legislation) solar on an investment property was excluded from the tax credit, although it’s available for a business. Classifying as a business would increase the return significantly, besides the diy aspect. I’d like to understand what it takes to classify a rental property as a business.

It's a capital improvement on a rental property. It depreciates over 5 years.

SO's parents added solar to all of their rentals. There is rarely a kwh charge on the bills.

I totally get that I can install solar on a rental and claim the cost as an expense.  What I'd like to figure out is that the IRS specifically says solar on rentals is not allowed for the 30% credit.  Are your inlaws getting the tax credit, and if so, how do they structure their business?  Are they owned as a LLC or some other method?

[uniwelder]

If the place didn't have solar, would it have been worth the same amount in rent to you?

Yes. I live in an extremely competitive market. The shittiest hell hole goes for multiple thousands of dollars, and is snapped up so fast your head would spin. Utilities cost does not factor into the decision, when the place could be rented out, sight unseen to someone with a tech salary, before you pull out of the driveway after a viewing.

Having solar was like if the kitchen sink had a disposal or the front yard was landscaped and watered on the LL's dime. Nice to have, but does not in any way drive the decision to apply.

You live in a different rental world than I do, so that really affects the decision making process.  The rentals I'm considering placing solar panels on are 2 bedroom homes that rent for $875/month.  Electric utility bills are probably in the $60-120/month range, so it's significant enough a portion of the expenses.

[theoverlook]

Do modern solar systems include the ability to report the house's monthly kwh usage? If so, could you bill for that, as an add-on to rent, to recoup the cost of the solar system, at a discount compared to what the electric utility would have charged for that usage?

[uniwelder]

Do modern solar systems include the ability to report the house's monthly kwh usage? If so, could you bill for that, as an add-on to rent, to recoup the cost of the solar system, at a discount compared to what the electric utility would have charged for that usage?

Yes.  Most are wifi enabled, so you can look at the real time energy output of the system and see monthly totals.  My friend has a solar installation company and most of his customers give him permission to monitor their systems remotely.

I've pondered this option a little bit, but the people I've asked haven't recommended it with a clear answer why.  Usually the landlord pays the cost of utilities or not.  Black and white.  One complication is that in sunnier months, the system is likely to produce more electricity than consumed.  The utility company (where I live) takes that excess output and credits it back 1 for 1 in the darker times (winter).  If I had access to the tenant's monthly utility bill, or monitored their meter every month, I could keep track of that, but there's privacy issues.  Its worth looking into more definitively, but that's probably one of the reasons I don't know anyone doing this.

[Villanelle]

I'm currently a renter (and a landlord), and I'd definitely pay more rent for a home with solar.  I might hesitate with a lease that billed me based on kwh, however.  I'm not entirely sure why, especially because DH and I tend to have lower-than-average electric bills.  It just feels weird.  So if I thought about it, maybe I'd go for that.  But paying $100 more in rent would be a no brainer.   (We live in a very HCOLA, and our rent in an fairly far-our suburb is $3600, so $100 would be a much smaller % than on a $900 place.) 

I wonder if you could offer 2 options, like $950 rent or $875 rent and then being billed XX per kwh.  I've seen leases that are $3500 with included lawn care, or $3600.  (I don't recall if that was the actual differential.)  So you could do something similar with the electric bill, and either their use from your panels is included in the higher rent, or they are billed for it. 

[bacchi]

Are your inlaws getting the tax credit, and if so, how do they structure their business?  Are they owned as a LLC or some other method?

They installed them under the previous regime (the 2016 bill, I believe) when the tax credit was specifically allowed for rentals.


Eta: See https://www.thetaxadviser.com/newsletters/2017/oct/credit-residential-solar-panels.html, for example. I don't know if it still applies.

[uniwelder]

Are your inlaws getting the tax credit, and if so, how do they structure their business?  Are they owned as a LLC or some other method?

They installed them under the previous regime (the 2016 bill, I believe) when the tax credit was specifically allowed for rentals.


Eta: See https://www.thetaxadviser.com/newsletters/2017/oct/credit-residential-solar-panels.html, for example. I don't know if it still applies.

Thank you for adding that link.  Its about the most condensed version of information I've been sorting through, and its still frustratingly difficult to read.  Its reassuring to see that the author is 1) a CPA and 2) an accounting professor.  Perhaps I don't have to reclassify my rentals as a 'business' to claim the credit.  This gives me hope.  I may have a handful of solar projects (my house + 2 rentals) coming up in the next couple of years.  Solar has become more of a priority since my electric rates went up 35% in the past year.

edited to add-- I find it funny that in the midst of all the IRS codes being cited in the article, the author concludes with this (bolded added by me)--- 
"The result is that solar panels installed on residential rental property the taxpayer owns should be eligible for a solar tax credit under Sec. 48, assuming other requirements for the credit are met. This is good news for taxpayers hoping to take advantage of the 30% tax credit for the cost of solar panels installed on residential rental property."

I wish there was something definitive out there that said, yes, solar on a rental property allows you to claim the tax credit.

[BORN SAVER]

The tax credits a good question in my case it won't matter as I live in it currently and when I move out I will make it a rental. As for charging for the solar I would just do a flat rate 100 or 200 a month kinda thing for simplicity it was beneficial for the tenant and my self. I wouldn't get into charging kwh unless I had a lot of rentals like this and some how found a way to completely automated into the bill. But even then I fill like this would be more of a head ache for the tenants instead of just paying a flat consistent rate.

[uniwelder]

@SeattleCPA do you have an opinion, or better yet, some definitive statement regarding the federal tax credit for solar on rental properties?  I just thought to include you after reading another posting here about taxes.

[clarkfan1979]

I have one rental in Fort Collins, CO in which the average cost is 10 cents per KWH. I have another rental in Koloa, HI in which the average cost is 40 cents per KWH. The idea of solar panels is going to depend very much on the cost of the electricity. I doubt I would ever do it for the Fort Collins rental. I will probably do it at some point for the Koloa rental.

[SeattleCPA]

@SeattleCPA do you have an opinion, or better yet, some definitive statement regarding the federal tax credit for solar on rental properties?  I just thought to include you after reading another posting here about taxes.

My daughter wrote a couple of tax blog posts about inflation reduction act as it relates to real estate. You can probably get details you want here:

https://evergreensmallbusiness.com/inflation-reduction-act-tax-credits-for-homeowners/

Or here:

https://evergreensmallbusiness.com/inflation-reduction-act-what-every-real-estate-investor-should-know/