Can You Take Residential Energy Credit on Rental Property?

No — you cannot claim a residential energy credit on rental property. The federal residential energy credits were only ever available for a home the taxpayer lived in, and both credits (the Residential Clean Energy Credit under Section 25D and the Energy Efficient Home Improvement Credit under Section 25C) ended for property placed in service after December 31, 2025. Landlords still have real tax benefits for energy upgrades, but they come through depreciation, bonus expensing, and the business-side energy credits rather than the residential ones.

Why a Pure Rental Never Qualified

The residential credits were built around a single gatekeeping rule: the improvement had to go into a home where the taxpayer actually lived. Section 25D covered solar electric, solar water heating, small wind, geothermal, and battery storage installed on a dwelling unit in the United States used as a residence by the taxpayer.¹ Section 25C was stricter still for building envelope components like windows, doors, and insulation, requiring the dwelling to be owned and used by the taxpayer as their principal residence.²

A single-family home you rent out under a lease, a condo listed on Airbnb that you never occupy, a fourplex where you live elsewhere — none of these met the residence test. The property is a business asset generating rental income, not your home. There was no filing angle that changed that.

Both Residential Credits Are Gone After 2025

Even for owner-occupied homes, the credits have now expired. The IRS has confirmed that taxpayers cannot claim the Residential Clean Energy Credit or the Energy Efficient Home Improvement Credit for expenditures made after December 31, 2025.³⁴⁵

One narrow holdover: if you claimed the Section 25D credit on your own home in a prior year and had unused credit that exceeded your tax liability, that carryforward can still be applied on your 2026 return using Form 5695.³ The carryforward only helps taxpayers who installed qualifying equipment on their own residence before the cutoff. It has no application to rental property.

Mixed-Use Property Was the Only Partial Path

If you installed qualifying improvements on a mixed-use property (a home that doubled as a part-time rental) before the 2026 cutoff, the credit was prorated. The IRS allowed the full credit when business use was 20% or less. When business use exceeded 20%, only the share of costs tied to personal use counted toward the credit.⁵ The Form 5695 instructions framed the same rule from the other side: if less than 80% of an item’s use was for nonbusiness purposes, only the portion allocable to nonbusiness use could be used to figure the credit.³

For a duplex owner who lived in one unit and rented the other, the cost of a shared improvement like a roof-mounted solar array would have been split by square footage, with only the owner-occupied share qualifying. Going forward, this math only matters if you’re carrying forward unused Section 25D credit from a mixed-use installation completed before 2026.

Depreciation Is the Primary Tax Benefit for Rental Energy Upgrades

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. The payoff is slow compared to a 30% credit hitting your return in year one, but it’s the mechanism the code provides.

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 The catch for residential landlords: bonus depreciation applies to personal property and certain qualified improvement property, and qualified improvement property covers only improvements to the interior of nonresidential buildings. Residential rental buildings are specifically excluded.⁸ Structural components of a rental house or apartment still follow the 27.5-year schedule.

Where bonus depreciation does help is on personal property used in the rental business: appliances, standalone equipment, and non-structural energy components. A standalone battery storage system or a portable generator can qualify for 100% first-year expensing.

Section 179 for Personal Property

Since 2018, rental property owners have been able to use Section 179 to immediately expense personal property placed inside rental units — kitchen appliances, carpeting, window treatments, and similar items. Section 179 cannot be used for structural components like windows, roofs, or built-in HVAC. It also cannot create a loss in the business; the deduction is limited to net rental income (plus any W-2 wages).

Business Energy Credits That Do Apply to Rentals

The residential credits are gone, but landlords who install qualifying systems can look at the business-side energy incentives. These are more complex to claim and often require professional certification, but the dollar amounts on larger projects can be substantial.

Section 48E Clean Electricity Investment Credit

For renewable energy installations on rental property — solar panels, small wind, geothermal, battery storage — the Section 48E credit is the business counterpart to the expired residential credit. It does not require the property to be your home. It applies to energy property used in a trade or business, which includes rental real estate.⁹

Base rate: 6% of the cost of qualified energy property.
30% rate: 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 under 1 megawatt, so landlords typically qualify for the full 30% rate without needing to navigate the prevailing wage rules. A $40,000 solar array would generate a $12,000 business tax credit.

One trade-off: the depreciable basis of the energy property must be reduced by 50% of the credit you claim.¹⁰ On that $40,000 array, a $12,000 credit drops your depreciable basis by $6,000, leaving $34,000 to depreciate. The credit still comes out well ahead of depreciation alone, but it reduces future deductions.

The Section 48E credit for wind and solar facilities is currently scheduled to expire for property placed in service after December 31, 2027.⁹ Confirm current eligibility with a tax professional before committing to a large installation.

Section 179D for Larger Multi-Family Buildings

Landlords who own larger multi-family buildings may qualify for the Section 179D energy-efficient commercial buildings deduction. This is a direct deduction, not a credit, for energy-efficient property placed in service during the tax year.¹¹ It applies to multi-family residential buildings of four or more stories.¹² Smaller houses and low-rise rental buildings don’t qualify.

The building’s improvements must achieve at least a 25% reduction in total annual energy and power costs against a reference building meeting ASHRAE Standard 90.1. A licensed engineer or contractor must certify the savings using IRS-approved software. The deduction is figured per square foot, scales with the percentage of energy savings, and is higher for projects meeting prevailing wage and apprenticeship rules. For 2025, the IRS-published ranges were $0.58 to $1.16 per square foot at the base level and $2.90 to $5.81 at the enhanced level.¹³

Passive Activity Rules Can Trap Your Credits

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

A partial exception: if you actively participate in managing the rental (decisions on 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 real estate professional status. If more than half your working hours go into real estate activities and you log more than 750 hours a year in real estate trades or businesses where you materially participate, your rental activities are no longer passive.¹⁴ Credits and depreciation can then offset any type of income.

Five-Year Recapture on the Investment Credit

If you claim the Section 48E credit, plan to hold the energy property for 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 steps down by 20% each year: 100% in year one, 80% in year two, on 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 $7,200 of recapture. Converting the property from rental to personal use can also trigger recapture if the equipment stops being used in a business.

Forms to File

Carryforward of prior residential credits: Form 5695. For 2026, the form is used only to apply carryforward amounts from installations completed before 2026.³
Section 48E investment tax credit: Form 3468, which feeds into the general business credit on Form 3800.¹⁵
Section 179D deduction: claimed directly on the return with supporting certification from a qualified engineer.
Depreciation: Form 4562, attached to Schedule E for rental income reporting.

If you hold the rental through a partnership or S corporation, your share of a business energy credit flows through on Schedule K-1 and then onto your personal return. The passive activity limits still apply at the individual level regardless of the entity.

1
Office of the Law Revision Counsel. 26 U.S. Code 25D – Residential Clean Energy Credit
2
Office of the Law Revision Counsel. 26 U.S. Code 25C – Energy Efficient Home Improvement Credit
3
Internal Revenue Service. Instructions for Form 5695 (2025)
4
Internal Revenue Service. Residential Clean Energy Credit
5
Internal Revenue Service. Energy Efficient Home Improvement Credit
6
Internal Revenue Service. Depreciation and Recapture 4
7
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
8
Doeren Mayhew. Expanded Bonus Depreciation for Qualified Improvement Property Under OBBBA
9
Office of the Law Revision Counsel. 26 USC 48E – Clean Electricity Investment Credit
10
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
12
Department of Energy. 179D Commercial Building Tax Deduction – Frequently Asked Questions
13
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