If you lease your solar panels, you can’t claim the solar tax credit

One of the best incentives for going solar today is the federal solar tax credit, which allows you to claim 30% of the total cost of your solar installation from your owed income taxes. As a dollar-for-dollar reduction of your income tax bill, the solar tax credit significantly reduces the cost of installing renewable energy in your home. Thanks to the Inflation Reduction Act of 2022, that means if you spend $20,000 on a solar energy system, you’ll save $6,000 when you file your taxes.

But there’s a key element to making sure you receive the tax credit: you must own your solar panel system. It doesn’t matter whether you pay upfront in cash or finance your solar panels with a loan – as long as you are the owner, you can benefit from the tax credit. You won’t be so lucky if you lease your solar energy system, however.    

If you lease your solar panels, you are not eligible to claim the solar tax credit. That’s because the 30% tax savings will instead go to the leasing company who owns the panels. Whether you sign a lease or a power purchase agreement (PPA), as long as another company is the owner of your solar array, that company will reap the tax benefits of going solar rather than you, negating one of the biggest financial benefits of using renewable energy in your home.

Taxes aside, another issue with leasing is that if you move out of your house before your lease term is over – typically anywhere from seven to 20 years – you’ll have to find a buyer who is ok with taking over your lease payments. If the new homeowner isn’t interested in your solar lease, you’ll still be on the hook for those monthly payments until your lease expires, despite the fact that you're not the one benefiting from the solar panels anymore. 

Even though you can’t benefit from the available tax credits, there are some circumstances when a solar lease may make sense. When interest rates for financing a solar loan are relatively high like they are now, the benefit of a lease over a loan is that the monthly payment may be slightly lower. However, as a general rule of thumb, it’s typically better to own your solar panels than lease them because of the financial upside of the federal solar tax credit and the potential to have a shorter payback period if you can pay off the loan faster.

As with any type of lease or financing, beware of companies promoting offers that seem too good to be true or that claim you’ll qualify no matter how low your credit score. You can get stuck with hefty fines or have additional fees tacked onto your contract if you don’t read the fine print carefully – and end up with an expensive solar agreement you can’t get out of.

In order to gain the maximum tax benefits from adding solar energy sources to your home, it’s best to buy equipment like solar panels outright if you can afford the high upfront cost. If not, taking out a solar loan is another smart option that still allows you to claim your 30% credit, because you’ll still own your solar panels instead of a leasing company. In order to set yourself up to receive the most favorable loan terms possible, one of the best things you can do is work on improving your credit score. 

“If you do decide to finance, make sure that your credit score is in a good place because that's going to have a dramatic effect on what interest rates lenders are willing to lend to you at,” said Jordan Naffa, director of financial planning at Arista Wealth Management. “The better your credit, typically the lower the interest rate is. So you want to make sure that you're building up your credit to ensure that you're getting the best deal possible.”