Is Interest on a Solar Loan Tax Deductible? HELOC, PACE, and the Cap

Interest on a solar loan is tax deductible only when the loan is formally secured by your home through a mortgage, deed of trust, or similar recorded instrument, and the money is used to install the system on that home. Most solar loans arranged through installers fail the first test: they rely on your credit or on a lien against the panels themselves, which makes the interest nondeductible personal interest. Financing solar with a home equity line of credit, a second mortgage, a cash-out refinance, or a PACE assessment produces deductible interest, subject to the $750,000 total mortgage debt cap.

The Two Conditions Your Loan Has to Meet

Internal Revenue Code Section 163(h) allows a deduction for what the IRS calls qualified residence interest.¹ The debt has to clear two hurdles at the same time.

First, it must be secured by your main home or a second home through a mortgage, deed of trust, or equivalent security instrument under state law. A signature loan doesn’t count. A UCC fixture filing on the panels doesn’t count. The lender needs foreclosure rights against the real property itself.

Second, the borrowed funds must have been used to buy, build, or substantially improve the residence that secures the loan. A rooftop solar installation is a capital improvement, so a loan whose proceeds paid for the system satisfies this prong when the first one is also met.

Both conditions apply together. A mortgage on your home doesn’t help if the money went to something else, and paying for solar doesn’t help if the loan isn’t properly recorded against the property.

Loans That Produce Deductible Interest

The common thread is a recorded lien against the home. Three financing structures reliably qualify.

Home Equity Line of Credit or Second Mortgage

A HELOC or second mortgage used to pay for a solar installation produces deductible interest because the debt is secured by the home and the proceeds fund a capital improvement.² The debt is treated as acquisition indebtedness rather than home equity indebtedness, which matters because interest on home equity debt used for anything other than improving the property is nondeductible under current law. Lenders on these products record a mortgage or deed of trust and report the interest to the IRS on Form 1098.³

Cash-Out Refinance

Refinancing your primary mortgage for more than the outstanding balance and using the extra proceeds for solar panels works the same way. The new loan is secured by the home, and the portion spent on the system counts as acquisition debt.

PACE Assessments

Property Assessed Clean Energy programs finance solar installations through a special assessment on your property tax bill. Because a PACE obligation is secured by a lien on the home, the IRS treats the interest portion of each payment as deductible mortgage interest. The principal portion is not deductible, and the payments do not count as deductible property taxes even though they appear on the tax bill. PACE availability varies by state and locality, and these programs carry their own tradeoffs, including a senior lien position that can complicate refinancing or selling.

Why Most Solar-Installer Loans Don’t Qualify

The loan a solar company offers at the point of sale is almost never a mortgage on your home. These dealer-financed products typically fall into one of two categories, and neither one produces deductible interest.

Unsecured Personal Loans

Many solar installers partner with lenders who extend credit based on the borrower’s credit score and income. These signature loans work like any other personal loan, and Section 163(h) makes interest on personal debt nondeductible.¹ Spending the borrowed money on a home improvement does not change the answer. Lenders on these loans do not issue Form 1098 because there is no mortgage.

Loans With Only a UCC Fixture Filing

Some solar lenders file a UCC-1 financing statement giving them a security interest in the panels and related equipment as fixtures. Homeowners sometimes read this as the loan being “secured by the home,” but it isn’t. A UCC fixture filing lets the lender repossess the equipment or assert a claim in bankruptcy. It does not create a mortgage lien on the real property. Since Section 163(h) requires the debt to be secured by the qualified residence, a lien limited to the equipment on the roof does not satisfy the statute.²

The simplest way to confirm which category your loan falls into: check whether a mortgage or deed of trust was recorded with your county recorder’s office. If the closing paperwork shows only a UCC-1 or no security document at all, the interest is nondeductible.

Leases and Power Purchase Agreements

Solar leases and power purchase agreements are not loans, so no interest exists to deduct. Under a lease you pay a fixed monthly fee for use of the equipment; under a PPA you pay a per-kilowatt-hour rate for the electricity it generates. In both arrangements the solar company owns the system, and neither involves borrowing money.

The $750,000 Debt Cap

Even when a solar loan qualifies, the deduction applies only to interest on the first $750,000 of combined mortgage debt, or $375,000 if you’re married filing separately.⁴ The cap covers every qualifying mortgage on your main home and second home together: your primary mortgage, any HELOC, and the solar loan itself. The One Big Beautiful Bill Act made this limit permanent starting in 2025.

If your primary mortgage balance sits at $700,000 and you take a $75,000 HELOC for solar, only the interest attributable to $50,000 of that HELOC is deductible, because the combined $775,000 exceeds the ceiling by $25,000. Mortgages taken out before December 16, 2017 fall under a grandfathered $1,000,000 limit, but any new solar financing today is subject to the $750,000 cap.⁴

When your total balances exceed the limit, you deduct a proportional share. Divide $750,000 by your average total mortgage balance for the year, then multiply by the interest paid. Publication 936 contains the full worksheet.⁴

How to Claim It on Your Return

Deducting solar loan interest requires itemizing on Schedule A. The lender on a qualifying secured loan sends Form 1098 showing the total mortgage interest paid during the year, and that amount goes on the mortgage interest lines of Schedule A.³

Itemizing helps only if your total itemized deductions clear the standard deduction. For 2026 those thresholds are $32,200 for married couples filing jointly, $16,100 for single filers and married filing separately, and $24,150 for heads of household.⁵ Your itemized total includes mortgage interest, state and local taxes up to the SALT cap ($40,400 for most filers in 2026, with a phase-down at higher incomes), charitable contributions, and other qualifying costs. If the total doesn’t clear the standard deduction, the solar interest produces no additional benefit that year.

Hold onto your loan closing documents, Form 1098, and installation contract for at least three years after filing. If your balances exceed the $750,000 cap, keep the workpapers showing how you calculated the deductible portion.

A Note on Rental and Business Property

The qualified residence interest rules cover your main home and one second home where you live part of the year. Solar installed on a rental property or a building used solely for business falls under different provisions (depreciation, the business energy credit, business interest expense rules) that this article does not address. If you run a business from part of your residence and business use exceeds 20%, the residential solar tax benefits have to be allocated between personal and business portions.⁶

1
Office of the Law Revision Counsel. 26 USC 163 – Interest
2
Internal Revenue Service. Revenue Ruling 2010-25
3
Internal Revenue Service. Instructions for Form 1098
4
Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
6
Internal Revenue Service. Residential Clean Energy Credit