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Tax Smart Real Estate Investors Podcast
352. Solar Tax Credits for Real Estate Investors: What's Legit (And What's Not) With Nathan Sosa
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In this episode of the Tax Smart REI Podcast, Tho…
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You're now listening to the Tax Smart REI Podcast, the number one tax podcast for real estate investors.
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Your source for all things real estate accounting and tax. Here we reveal our secrets that can save you thousands in taxes, streamline your accounting process and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors and current clients on what strategies they use to grow their business and how they steer clear of Uncle Sam.
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Hey everyone, thanks for tuning in to this week's episode of the Tax Smart REI Podcast. Today we're joined with Nathan Sosa, head of our national tax department here at Hall CPA discuss a very important topic and that is solar tax credits. How do they work? How much can you deduct? Is it going to be active? Is it going to be passive? Are syndicated solar tax credits legit or not? We'll be answering all these questions and much more in just one minute, so stay tuned. Of the year again. The New Year's right around the corner. If you've been listening to the podcast all year thinking I really need to get proactive about my tax strategy, then this is your moment. Because the truth is, you probably don't even know how much money you're leaving on the table. At Whole cpa, our team helps real estate investors and business owners save thousands of dollars through proactive year round tax planning. Whether you're looking to optimize cost segregation, leverage the real estate professional status or short term rentals, or structure your investments for maximum tax efficiency, then we've got you covered. But here's the deal. Spots for new clients are limited as we approach year end, so if you want to lock in your strategy before tax filing hits, don't wait. Check out the link in the show notes to request a consultation and start working with our team before you miss another opportunity to keep more of what you earn. All right, and we're back. So again, we're going to be talking about solar Credits here today. Really excited for this conversation because there's a lot of myths and misconceptions floating around there on the Internet and we're here to kind of break it all down. Nate, before you know, I know you've been on the show before you've been on the show just recently. Could you give us a brief breakdown of your background and kind of what you do, you know, what your deal is here at Whole cpa.
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Totally, Tom.
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Yeah.
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So I, I do a lot of internal work with our tax folks, trying to help them sort through a lot of what we call gray areas in Tax code. Right. There's a lot of gray in tax and trying to figure out, hey, what's the proper treatment? How do we take this position? What should we do here? Also there's a lot of technical training and understanding what we do here. What. Also do a lot of that work with our large clients and with like other clients too. Right. So I've got some clients that I still work with one on one, but for the most part a lot of my work is a lot of talking with you and also working with our other tax departments on what positions we're taking on a tax return and also trying to sort through some difficult gray areas when it comes to tax. Right. What positions should we take? And also, of course, trying to further and expand our knowledge as a firm of what we can do and interesting ways we can help our clients save more money.
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Absolutely, absolutely. All very, very important, exciting stuff. So let's dive just right into the solar tax credits. I know that's what everybody is waiting to hear about here. So let's kind of just set the stage. What exactly are solar tax credits?
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C
Yeah, solar tax credits are basically if you decide like the government kind of went a while ago and they said, hey, if you, if you decide to put in a. So it's like solar panels, right? You want to put in solar panels. And they wanted to basically subsidized what you call these green energy credits. And so you've probably heard a lot of the headlines that they want to change a lot of that with the new one big bill. And they did. But long story short, they basically say, we want to give you a tax credit or a tax. We will send you a check for having used or putting in place any kind of anything related to solar. Essentially. Right. That's essentially what it comes down to. And so what does that mean? That means the government says, great. Just like with child tax credit, they say, hey, you've got kiddos. That means we want to give you guys a $2,000 tax credit per kiddo because you've got kids. So in this case, if you put in X number of dollars solar panels. Right. Let's say you install $100,000 of solar panels. That means you will get a 30% tax credit on that for $30,000 at the end of the day, which is great. Right? So that means if you put in $100,000, so there's immediately a 30% return on your investment, essentially. Right. That you're going to be getting back in a dollar for dollar reduction in your tax liability. Right? Because this is a tax credit, right? As a tax credit. Tax credits are great because they reduce our liability. It's not a deduction. Deductions, right. For every dollar deduction, you get 30% write off ultimately. So that's the difference there, I would say, when it comes to solar credits. But here's the neat part, that you also get a deduction for the solar panel, assuming it's for a business. Right. If it's your residential, we'll talk about the differences there and what they do. But you do get, if it's for a business, you get to write them off with bonus depreciation 179, or even just normal depreciation. So you get that plus you get the tax credit, which is a fantastic double whammy, actually.
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Okay. Okay, guys, so let's just kind of sum this up real quick. So solar tax credits, basically, the government wants to incentivize people to use solar energy, installing these things on their properties in order to generate power, which I'm sure there's good reasons for that. And in exchange for doing that, the incentive is you're going to get a tax credit which offsets your tax liability dollar for $100. Unlike a deduction which reduces your taxable income, the credit is actually going to offset your taxes directly.
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C
Correct, Tom? Yeah, you got it.
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Cool, cool, cool. So maybe we could break down, just like I know there's. You could do this on your primary residence or residence you have and business. I know there's some differences here. Can we break down maybe one by one how it works?
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C
Yeah. So actually this is a, this is actually a tax strategy that goes away at the end of this year. Right. And the one, the beautiful bill, if you put in solar properties on your personal residence, you can get that 30% tax credit. Right? So, Tom, you're in sunny Miami, and if you decide that you want to put some solar panels on your personal residence, that means that you're going to get a tax credit. However, the kicker is you got to do it before December 31st. Because if you wait, the actual ability to do that on personal residences goes away. December 31, 2025. So this is something you're thinking about. Maybe you've had people come knocking on your door and saying, hey, if you install solar, you're going to like, I'm going to give you an estimate on utility. Maybe consider it. Right. Maybe they actually will save you on your utility bill. And then you're also going to get a payout from the government for, for the amount of debt you install and actually that could just double win, right? You just saved on your electricity bill, which is great. And then you also just got a tax credit on your personal residence, which is awesome. So that is something that does end this year. So if you want to take advantage of it or have thought about it, you got to do it pretty soon. Right. We're walking into November pretty quickly, so I would highly recommend taking care of that. Now the next one is rental properties, right? A lot of short term rental owners I think about, hey, they've got properties in Arizona or someplace that's very, very sunny. Right. A lot of vacations, of course, vacation rentals you're considering. Should I install solar panels? Does it make sense for us to do that? And the question is maybe, right? We want to make sure we don't want to just do things for tax benefits, right, Tom? That's kind of what we've, we've talked about that a bajillion times in this podcast at this point. And so with that being said, now we want to look into. Okay, great. Is it going to save on me, my utility bill? Right. It's one of the larger costs that people deal with who run short term rentals or properties in general. So if we can save on that, that's awesome. Then guess what? We're actually going to get once again a tax credit for installing, for installing $100,000 solar panels. Fantastic. That means we're going to get a 30% tax credit back to us. Now this is a kicker. This is really important to know. Great. I talked about bonus appreciation. You want to bonus 100% of those properties. That is fantastic. We do have to adjust the tax credit by the amount of the purchase price as well. So just an FYI on that piece that we have to consider that as well, that we're going to need to reduce that. But regardless, that's still a pretty large bonus, especially right now in 100% bonus world. Right. Since the one big beautiful bill could take advantage of that write off. And with that being said too. So that means that's more tax saving on top of the tax credit we're getting overall, which is fantastic. Right. That's a lot of tax savings in one year that we're going to take advantage of just for installing something that's also probably going to save us money. It can be. Not always, but it can be a no brainer for some people. Okay.
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Okay. And this is. We're just talking about primary residences here. Right. So. And this is going.
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We saw. Yeah, we Flipped it. We flipped to rental property. Yes. So we're talking primary residences and rental properties. Right. So we flipped to rental properties too. So this is like if you have short term rental, long term rental, something like that, where you can actually take the bonus appreciation and the credit.
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Okay, cool, cool. So if. Just break this down. Do you have like an example of like, say you get something on your primary residence. What is the ultimate tax benefit of doing that?
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Yeah, so the actual tax benefit doing that would be so if you get $100,000 of solar panels on your house or something like that, and that means you would get a $30,000 tax credit back to you, but it has to be done this year. Okay.
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So this is going away at the end of 2025. Bye. Bye.
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Yeah, it goes right at the end of 2025. It got pulled out and it goes away because of one big beautiful bill.
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Okay. And is there any other requirements or anything else people should be aware of when it comes to primary residences for the solar tax credit?
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That's pretty much the long and short of it, in all honesty is I just got to make sure it's done by the end of this tax year. Right. That means like now there could be like, there's some restrictions that like you can either the construction needs to be done by the end of this year. Right. So that's, that's the key piece that needs to be done by the end of this year to ultimately qualify.
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Okay. And the same is true for rental properties. Right? They're going away too, by the end of this year.
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So not the answer that. So that's what's different is that they don't go away by the end of this year. Rental properties don't go away. December 31, 2025, you get to keep using this strategy, but they go away at the end of 2027. So I only get two more years of getting the ability to take advantage of this. Right. So because of the. A weird change in the one big beautiful bill, now they are going to. They only have two more years of being, being able and eligible to take advantage of this. It actually changes code sections too. It's like 48. Section 48 for solar properties goes away becomes 48e now. That's right. And so that's got a lot of different rules in there. Long story short of it is that we can do it, but goes away 2027. Okay.
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Okay. And so for a rental property owner, right. Say I own a rental property. I'm considered taking advantage of this strategy. What do I need to do to qualify for this. Is it same thing just going out, getting a solar panel and put, you know, having someone install it on my roof or is there other things, other hoops that I need to jump through?
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C
Yeah. So if you read the regs, if you read the actual code, it feels like there's a lot of hoops you got to jump through. Like apprenticeship, like an available apprenticeship, wages, et cetera. It's a really complex and confusing, but it's all becomes based on the electricity that you generate. And actually most solar panels on like a residential home. Again, double check this with an engineer when you're doing the conversation. But if you're below like a kilowatt I believe is what the measurement is. Not an engineer, sorry. But if it's below the kilowatt, that means all those special rules don't apply to you. Right. All those big special rules apply to like more larger commercial installations. They don't necessarily apply to the like, just like if you're a STR Airbnb in Arizona or something like that, that won't apply to you. So you're going to be able to take advantage of this just by going out and getting solar panels.
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Okay. And is the deduction the same thing for rental properties, 30% or is that different?
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Yeah, so the credit is 30% still the same thing there. Right. So you get a 30% tax credit at the end of the day. And the only difference is you have to take that deduction for depreciation. Right. So that's the difference here is that you only take that the, is that you will, is that you'll get. Still you get depreciation or 179, whichever is more beneficial for you. And. But you have to reduce your basis by the 50% of the tax credit.
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Okay, okay, that makes sense. That makes sense. And I know we're going to go through syndicated tax credits here and talk about passive versus active. Right. So on the resident side, because it's like a personal thing, they're not material. Participation doesn't matter. Or does it?
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Right? No, it doesn't matter whatsoever. Right. I mean you're living in your home. I don't know what you can do from material participation standpoint. Right. There's like I think necessarily applies here. So that's, that's a good thing.
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Say I own a rental property. Right. I don't have reps. I'm not using the short term rental loophole. It's a passive investment for me as far as, you know, taxes are concerned. I go get this tax Credit. I have 30,000. Whatever the 30% amounts to for me, am I able to use that tax credit to offset my tax liability or do I need to materially participate to make that passive or not passive?
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Great point, Tom. You have to materially participate. In that example, if you're managing a short term rental, right. You're going to want to materially anticipate that. You're going to want to be able to claim the tax. If not, credits and deductions apply, have the same active and passive rules where you get trapped at the end of the day. So you need to materially participate to be able to use those credits, let's say offset high W2 income from some other source or some other business income. Otherwise it'll get trapped as passive and will only offset passive tax, essentially.
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Okay, that makes sense. That makes sense. The bottom line is like for these to be non passive and offset by non passive tax liability. Right. Because we're not talking about income here. It's the actual tax liability I need to materially. Okay, okay, so yeah, that makes a ton of sense. All right, so if we're going to move to take this a step further now, there is something going on out there in the marketplace. There's sponsors out there, syndicators who are syndicating, in a sense, solar tax credits. And I think that's where a lot of the misconceptions around this come in. Could you kind of share what those types of investments are and kind of what the issues with some of those types of investments are?
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Yeah, so this is the most common one that I've been seeing come out lately is where basically you have a promoter, a promoter walks out and says, hey, we want you to purchase our solar properties, right? You will come purchase our solar panels and our solar properties. And what you will do then is we will facilitate the installation of all this. And then if you'd like, we'll handle the management of these solar properties as well. You will be hands off on this investment. You don't have to do a thing. And by doing this investment, you're also going to get these beautiful tax benefits. You're going to get depreciation, you're going to get to use bonus depreciation. You get to use 100% bonus depreciation right now is what they'll talk about. And then they'll also then say, hey, guess what, there's these tax credits you get advantage to called the investment tax credit, the ITC. And what that means you're going to get 30% of whatever your purchase price is by doing all of this stuff. So now you own the properties, you put it into an LLC, right. It's owned 100% by you and actually now you'll lease it out to somebody else. You lease it out under a service contract. So you're selling the electricity per se, Right. What you're doing here. So I'm renting out, leasing the solar panels and the electricity at the same time to whoever the tenant is. Right. Maybe it's a big commercial building, maybe it's not, etc. Who knows what it winds up being. But you then do that and then they're going to handle the construction, go handle the management, they'll do all this stuff for you. Right. And so that's one of the main ones that I'm seeing right now. That comes out a lot. The other one that happens is basically where you start pooling some solar projects where you invest into a large partnership potentially or something like that. This one's a little bit more different, but you invest into a large group or fund and so then they're going to pass out solar credits to you. Right. It's the same process, but you're buying probably more larger chunks of installations potentially, or maybe it's just a large pool of various solar panels that are scattered around, but you're going to do that and invest that way and then you'll get a K1 and the other one, you're not going to get a K1, you're just going to get a report of what your purchase price is, the income earned, etc. Right. So that's. Those are two different. One's going to be a K1, the other is likely going to line on a schedule C when you're filing. Right. So those are the two main ones that I'm currently seeing right now. Right. Either you are just purchasing and owning via your own single member LLC or you're going out and you are doing it via a big large fund and getting a K1 that is being allocated or sent to you once with that happens. Those are the two main ones that I see. And of course they are targeting high income earners, business owners, real estate investors. Right. That's what they're looking for. Anyone that's got a large tax bill that's dying to offset it. Right. We all are trying to find ways to lower and minimize our taxation. Right. And so that is who they are promoting to and trying to hunt out and see if they can find help, save on a liability.
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Are you Ready to unlock hidden tax savings within your real estate or business As a national leader in specialty tax services. For more than 25 years, Engineer Tax Services performed over 75,000 engineering based cost segregation studies, delivering more than $2 billion in measurable tax advantages to their clients. Why does cost segregation make so much sense? Because it's not just about taxes. It's making sure you put more money back to work in your business and fueling your next investment. You'll see increased cash flow, you'll see sped up roi. Plus you get clear insights into your property and support from an expert team. It's a simple process with big results and the smartest move for serious investors. If you're interested in learning more, you can contact Engineer Tax Services using the link in the show notes. That's it for now. We'll dive right back into today's episode. Okay. Okay. And we're going to get to the passive versus active of that. But before we get into that, so are these investments in of themselves, the syndicated solar investments and are they legitimate investments? I mean, okay, is there anything below board or are they above board, so to speak?
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C
Great question. Yeah, great question. That's a fantastic question, Tom. Most of the ones that I'm seeing are above board. You're. Well, there are ones that exist. So this is what I always say. Vet, vet whoever you're investing with. There's a very, very famous tax court cases out there from the past couple of years where someone did not vet very well and they bought basically a gimmick and a scam and so they like 300 investors were affected by this. Right. So always vet your people. But most of the ones that I'm seeing nowadays are very legitimate. You are actually purchasing solar panels, right. You're not just buying a bunch of nothing, purchasing solar panels. They're actually being installed and there's actual cash coming in the door too. So is it legitimate? Yes. What I'm seeing is that it's legitimate. These are not. This is not David Silk or something like that that's happening. Right. This is from what I've seen. I can't guarantee on all of them, but once again, so I would say vet whoever you're working with, but these can and do look legitimate.
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Okay. Okay. So, okay, they're legitimate. Now I think the issue or the confusion or the myth around this is, or the misconception is that these investments will offset the active tax liability or the non passive tax liability.
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Correct.
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How does that work? And I know we kind of just highlighted that, but this is break it down.
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C
Yeah, let's definitely break it down, Tom. That's why we have actually a white paper that's coming out from Hall CPA coming in the next few weeks about this exact topic. Because we've seen it pushed, we've seen our own clients being suggested to use this strategy. And so we decided that we wanted to come out and talk about what are the risks and rewards of this and what the issues that we personally see with this type of structure. Right. So the biggest issue that we see with at the end of the day is not basis, it's not whether this is actually legitimate, right? That's none of our concern. That's not our issue at the end of the day. Our issue is can an investor actually materially participate in this investment? Right. We've talked about material participation so many times on this show. So. Right. It's like this is not something that's new to our listeners. But for Anyone who's new, 469 basically says that you have to be involved in your investment to claim the losses against your active income at the end of the day. Right? Same thing with short term rentals is like vastly applies to a lot of other ways work, right? You got to be involved in your rental, got to be involved in the management of it, got to be 100% working in it, et cetera. Treat it like it's your own, right? Now if you'll get a third party management company, right, that's when you start to lose all those tax benefits, unfortunately. So what does that mean then? Right. And so of course a lot of these syndicators definitely know and understand that that could be the potential issue for them. So they've picked up on that. So what they do is they try to say, hey, great, we'll just change how the wording in the management document is. And we're actually, what we're going to do is we're going to have you come out every quarter, we're going to have you come every single quarter and you're going to listen in, we're going to talk about the financials, talk about how things are going, the improvements we're making, all those types of things. And then we'll sit down one on one with you at this conference and we'll show you how your investment's been performing, et cetera, and other ways you can get more involved if you'd like to be. Right. That's what they'll start suggesting. So you'll do all these kinds of investor meetups, flying out There emails, paying down the debt. Because there's a lot of debt that gets associated with these funds too. Not everybody does all cash or something like that. And so as I say, look, with all of this time, you're easily going to hit the a hundred hours plus more than anyone else test. Right. We don't have that many people who have to be involved with the solar panels management. Right. No one's actually going there every single day. So you're easily going to hit 100 hours, no problem. Don't even worry about the fact that there's a management contract with us. That's generally their pitch, right, Tom? Now after hearing that, you can think of some of the issues that might come up from that.
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A
Yeah, yeah. I mean, if you think about all the material participation, like what are these hours are actually material participation, Right. Like, and what are you actually, are you actually doing anything that's material to the actual operations of this or is this all for show? Right. And we know there's the carve out under 16, 469 that if this is being done, you know, not custom, I think the language is not mistaken, not customarily done by owners that, that it can, that the IRS can. And I'm sure they would disregard some of these hours breaking your case. I think that's, that's the biggest issue I think we have of it is, you know, are you actually materially participating? And there's no way that you're spending more time than everybody else for that hundred hours. Right. I mean, than the opera. The true operators of this.
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C
A hundred percent. Yeah, you're totally on point. Right. And so that's like, that's exactly it. Is that like, you know, there's, there's plenty of court cases. Sure. Some people try and say that these are just real estate court cases. They don't apply to solar. And I would say, sure, I hear what you're saying. But at the same time, the fundamentals still apply, right? Like someone like, for example, like they got a condo and they were. It was managed by the actual condominium association. Right. They were not involved, but they would show up to every single annual meeting. Right. They show up to the annual meetings, they would review correspondence. They would have, they get monthly reports and review all of that. They would provide rental agencies, do cash flow analyses. Right. Do all these types of items. This is a taxpayer case called tubes. Commissioner TC memo 1993 59. And essentially they're like, oh, we're totally active in this. And the IRS said, you are absolutely not active. In this whatsoever, right? You have a management contract with another person, they're being involved with it, they're doing all of the work. So you're not going to qualify, you're not going to be able to actually material participate. And the court agreed with them. They said, yeah, I don't see anything here that said that tells me otherwise. Right? So because they had a standard management contract, right? That's what the issue was. So what do you do then, right? What do you do if like say if you have someone saying, hey, we're going to manage all this for ourselves, we'll take care of like basically if you, if it's a no sweat investment, essentially, that means you're probably not going to be able to materially participate. And a lot of those active tax benefits you're being promised are probably not going to be achievable. Unfortunately now and then there are some companies that say if you want to expand the management contract, right, you want to like, we are flexible in doing that, right? And maybe that provides some opportunity and so able to stand on it, change it up a little bit where you can now actually be more involved in other folks, right? You can actually be more involved. Maybe you can actually make phone calls. I've heard of some situations where you, they're like making the phone calls, making sure, hey, is everything up and running? How are things going type stuff, right? Maybe you can get there, but I think you're also manufacturing hours, right? Like if you're literally calling the phone to your tenant every single day, hey, how are the other solar panels up and running? Right? They're going to go, guys, why are you calling me every single day? This is ridiculous. I don't need this, I don't need this type of help with this information, right? So that's one of the things is that like it's going to be very difficult to finally get to that step, that it's actually going to be a material participation, right? So like that, like, so if you have a management contract, it's definitely going to be a shot in the foot, right? There's a task force case called Toland v. Commissioner where someone was involved in horse breeding, right? Someone involved in horse breeding, right. Again, it's not solar, but we like to apply concepts from tax court cases and use them in other circumstances. So again, so in told him he's horse breeding, right? And so generally that's always struck down as not being passive, but he was insanely involved. He was making phone calls, he was marketing, right? He was doing all These types of items that someone would expect to do if that was their business, essentially. Right. So that was, that was really crazy about that case too, is that like there was someone he, like he was so involved and he so cared about having this, this activity be profitable that he was the one who is making phone calls, being involved. Right. He didn't toss that to someone else, act for someone else to be involved with it. Right, Tom, that's what we always run into with this type of stuff is that someone just doesn't understand the hundred hours, like those, like those investor level hours, right. If I just pay the mortgage or I pay the, if I pay the bill, right. That gets me hours, essentially. Right. And yeah, sure, you can say that, but it ultimately doesn't count at the end of the day. Right, Tom. So that's, so that's another thing that people need to consider and think about more often.
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A
Yeah, you know, that makes a lot of sense. So what I'm hearing here, like, I, I've looked into this, you know, lightly, personally in the past to kind of. Because I've received, I've seen some of the same issues out there. And so I just want to clarify for everybody out there, because I know they're probably hearing conflicting information from what we're talking about here and what they've heard from other people. Basically from, from what my understanding is, is the argument is that you're going to be materially participating in the solar operations. Right? But there's a very weak argument for that. I mean, isn't there like professional managers running this stuff? I mean, look, if I'm just putting myself in the shoes of an investor, right? So I bought a house, right? Or say I had an investment. I don't know anything about solar, right? What am I going to pro. Or say I have an apartment complex, right? I put solar panels in the apartment complex. I don't know much about solar, right. I, I'm gonna, Someone's gonna be managing that, right? Like, isn't there someone actively managing the actual solar investment or is it the, is it the investor actually make doing. Are they actually doing all that? Right, that's what I'm asking.
- [25:05]
C
Yeah. And so that's. Is this is where some of the places create flexibility. They allow you to change the concept, say, oh, we can take care of all of it for you, no problem. And then sometimes they go, well, if you want to be more. Someone asks, well, I want to be more involved because they've talked to, they have tax, tax pro who's working with Them and they say, hey, hey, you're not going able to use any of these losses that you can advertise. They go, well, we can modify the contract, you can be a little bit more involved. And that has worked for some taxpayers in the past. Right. However, it's still an abstantial level, a substantial level of involvement that needs to be required from the taxpayer. Right. And so they still need to be actually like doing marketing, trying to get tenants looking for leasing. Right. Doing actual things to be involved with it is like really important. So there's actually a solar tax. Okay. I mentioned earlier, it's called Preston v. Commissioner. It's from 2021. Essentially a law firm partner invested into the solar program. Essentially. Now it was like solar lenses. It's not solar panels, but same rules kind of apply. Granted. Actually I came out through this massive fraud, right? Basically these like things were never even taken out of the box. And we're like basically fake gimmicks. So that's first off. But they did walk, the court decided that they did want to walk through the material dissipation items, right? They said, hey, look, these are illegitimate, never placed in service, et cetera. So we're going to totally ignore that part. But we want to walk through the 469 piece. And I think the reason why is because they understand this stuff exists out there as well. And so essentially they were like, hey, Preston, who is the name of the, of the law firm partner here, was not involved in the day to day operations. So that means all those emails, the site visits, email correspondence, holding calls, going to like conferences, right? All of that stuff did not qualify because it was tagged as investor level hours. This is the issue that a lot of people think, they think they can get away with this. I think no problem under an audit, right? We'll be able to achieve this. Or what they're hoping is that you just don't get audited because they understand what might. They may or may not understand what will happen when once it does. And so because this going back to Preston, Preston was not able to achieve or use these losses if they even had been legitimate, right? Because of 469, his day to day job was being a lawyer, right? That was his day to day job. The day to job was being a lawyer, not running solar panels. And so essentially because of that, he was not able to qualify. And I think a lot of people would wind themselves falling into this bucket too, actually. So as much as it sounds magical and amazing and definitely. And it can be a very Powerful tax pool. And like I always say, right, no one's situation is the same across sports from a tax perspective. But what you have to take into note is that it's not also not going to be as easy or as quick or magical as it sounds at the end of the day. Tom, any thoughts that you have there?
- [27:45]
A
Yeah, yeah, no, I'm just kind of thinking I'm putting this all into perspective from everything. I've talked to a lot of prospective clients and current clients about stuff like this and kind of what I'm hearing is kind of in summary, if you qualify for the solar credit on a residence like so your house that you live in, for example, that credit, if you meet all the requirements, is going to be non passive for you and help offset your tax liability regardless of whether or not you're actively involved. That's more or less because it's like a personal thing and not a business situation. Right? Now, when you enter the business situation, when you're absolute powers on your rental property that you own directly, it will be passive or non passive based on whether or not that activity is passive or non passive for you. Which means the real estate professional status for our long term rental investors out there and short term rental investors. Right. And then if you're going to be investing in syndicated solar credits, I almost said land conservation easements, but syndicated solar credits, that's going to be passive for you unless you're materially participating. And the challenge, and that's where the challenge comes in. So like these are not illegitimate investments, they're legit investments. The question just comes down to is whether or not they're going to be. You obviously have to do your own diligence and so on and so forth. But what the crux of the issue is whether or not it's going to be passive or non passive based on whether or not you materially participate. And there's a very, very, very weak argument to be made that you know, your typical investor is going to be able to materially participate in these things. It seems like there's a lot of evidence that would suggest maybe not tied directly to solar panels themselves, solar credits themselves, but would suggest this be very challenging to do. So that makes it not a very viable strategy to offset your tax liability resulting from your active income.
- [29:22]
C
Yeah, it's a lot less attractive. Right. When you start breaking all that stuff down, right. Maybe provides great returns, are so fantastic, but at the end of the day, if you're being mostly sold in tax benefits, it's kind of hard to stomach at that point in time.
- [29:34]
A
Yeah, yeah. So I'm almost wondering to what extent would investing in syndicated land contra easements make sense outside? I mean, I guess if you have a lot of passive income, right. Maybe you're a passive investor and you don't have enough depreciation to offset your, your passive income and you're generating a high tax liability as a result. Perhaps that makes sense. Am I missing, is there another use case to this that I'm not seeing?
- [29:58]
C
I think it's a fantastic. Right. So like I said, not every situation is the same. I think it can, I think it could be possible for someone to participate. I think it's insanely unlikely that most would be able to do it. So if you have a lot of income like you're saying tomorrow, I think it makes absolute sense to do this type of investment because you're going to be able to utilize those credits without having to lift a finger sweat, do whatever. Right. You install and monitor and view your investments, all that wonderful stuff. But that's going to be make the most sense tax wise because it also requires the least effort from you. Right. Return on hassle. So important is a really big item that we need to consider when we're going into this type of stuff. So top two use cases for this. Right? You're able to modify and change that management contract and really, really get involved in the business. I think maybe. Right. Still like talking tax pro, make sure it's actually possible. Or you've got a ton of passive income and a lot of tax liability. Right? Those are the two situations. I think it makes sense to look into this type of investment and even consider it. Right. But even then double check and vet your sources. Right? That's, that's pretty much what I think is the long and short of it there.
- [31:00]
A
Yeah, yeah, no, that makes a lot of sense. And the last thing I'll say on this is I was speaking to someone at a conference and he, he was, he was a syndicated tax credit like solar credit promoter, right? He did like he was a sponsor and he was selling it to everybody as ways to offset your passive income tax, the tax liability resulting from passive income. So it seemed to be that he understood like, hey, this is not going to be a non passive thing for you. And that's how he was kind of selling it. So that kind of all makes sense. That all makes sense. Any final words on this before we kind of wrap up today's episode?
- [31:31]
C
So yeah, that's what I'll say. Like look, if you Want to do a personal residence by, you got to do it by the end of this year, right? That's still available to anyone and everyone who wants to put solar panels on. So use it this year. Rental properties can make a lot of sense, right. I always like to do the ROI calc to actually make sure you'll get returns on your savings, not just the tax benefits. Or if you want to do some kind of syndicated investment, right, where you're leasing the solar panels or you're investing in a fund, et cetera, just double check and make sure that you are going to be able to aim to participate or B, you have enough passive income to offset it all. That's how I'd sum up today's conversation. Tom and Tom, before we wrap up, one thing I want to mention is the solar promoter white paper is in the link in the show notes below. So if you guys want to take a read at it, right. Try not to make it too boring. If you're interested in this type of stuff, click the show notes, click the link in the show notes and you guys get access to it right then and there.
- [32:18]
A
Okay? Okay. No, this is, I think, I think this gives a lot of clarity. I, I, you know, I hope so because this kind of ties back to the W2 tax episode that we did recently here on, on the podcast. You know, at, at the end of the day, we're not hiding stuff from people. If we're not talking about it as a, a strategy to reduce your active income. And that's often where a lot of myths and misconceptions come in, is around the ability to offset active or non passive income, then it's probably not a really viable path. Right? Again, we're not hiding things from people. We're not saying here's the secret strategy that like is behind a curtain. It's just if, if we do our due diligence and we believe it's not legit, then we're not going to recommend it. And if we're not recommending it, it's probably not legit.
- [32:59]
C
Right?
- [33:00]
A
That's probably what's going on. So we're always happy to evaluate new strategies that people hear about in the marketplace. But whenever you get too creative in the tax base, that's I think, where people run into a lot of issues. Right. Like, I feel like when you look at the world of tax, it's like here's the playing field and you can get creative within that playing field, but you're not reinventing new rules, you're just piecing together the rules and the pieces of the puzzle in a way that's going to make sense for people's particular situation. If that makes any sense right there.
- [33:30]
C
100%. It definitely does. Right. So like there are rules to play with intact and you got to play in those rules. But if you step outside now, your plane was fired, the IRS might come knocking at your door one day and might be a lot of money at a paying back and so we want to avoid that as much as possible.
- [33:45]
A
Cool. Well Nate, I appreciate you coming on and sharing this information with us. Hopefully it clears up some things for people out there. You got some time for the personal residents to get this done before year end. And if you're going to be doing this from a business or investment perspective, you got some Runway. So if you're looking to get a conversation started with a tax advisor can help you navigate these waters, help you make sure that you're taking advantage of the strategies that are available to you to help you reduce your taxes. Go ahead and schedule a discovery call. Link is going to be in the show notes or in the video description if you're watching on YouTube of this episode. So looking forward to seeing you on the other side. But that's it for today's episode of Tax Smart REI Podcast and we'll catch you next week. The Tax Smart Real Estate Investors Podcast is for general information purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. Information on the podcast may not constitute the most up to date legal or other information. No reader, user or listener of this podcast should act or refrain from acting on the basis of the information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Use of an access to this podcast or any of the links or resources contained or mentioned within the podcast show or Show Notes do not create a relationship between the reader, user or listener of the podcast and the host, contributors or guests. Any mention of third party vendors, products or services does not constitute an endorsement or recommendation. You should conduct your own due diligence before engaging any vendor. For more information, reference the show notes or description of this episode.
- [35:15]
B
If you enjoyed the show, please find us on itunes and leave us a review. You can also email us@contact therealestatecpa.com with any feedback or topic suggestions. We are always taking on new clients and with the new tax laws in play, you really don't want to navigate this alone. Let us help you save money on taxes with your accounting and CFO needs to become a client. Navigate to our client page@therealestatecpa.com and fill out a web form with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your week.