Landowners entering into a solar lease face several potential tax implications they should carefully consider:
Property Tax Implications
- Loss of Special Use Valuation or Exemptions: Solar installations on agricultural or special-use land often cause the land to lose eligibility for favorable property tax assessments. For example, land classified for agricultural use might be reassessed at a higher market value once a solar project is installed, triggering a rollback tax where the landowner owes back taxes reflecting the difference between the previous exempt valuation and the new taxable valuation.
- Increase in Property Taxes: The presence of a solar facility can increase the overall property tax liability for the parcel. The solar array is classified as real property once permanently installed, and is taxable unless a local exemption applies. The increase may apply not only to the leased portion but also to unleased portions of the property.
- Responsibility for Paying Taxes: Since the landowner’s use and control of the leased property are significantly restricted under a solar lease, it is common and advisable for landowners to negotiate that the solar developer assumes responsibility for paying any increased property taxes resulting from the project. This can be included as a clause in the lease agreement to protect the landowner from unexpected tax burdens.
Income Tax Implications
- Lease Income Taxable: Payments received from leasing land for solar projects are generally considered taxable income. The landowner should report lease payments as income on their tax returns.
Other Considerations
- Personal Property Tax on Solar Equipment: In some jurisdictions, a portion of the solar equipment may be subject to personal property tax, which is separate from real property tax. For example, in North Carolina, a percentage of the facility’s installed cost is subject to personal property taxation and depreciated over time for tax purposes.
Summary Table of Key Tax Implications
| Tax Aspect | Potential Impact on Landowner | Mitigation/Consideration |
|---|---|---|
| Special Use or Agricultural Tax Exemption | Loss of exemption, rollback tax liability | Negotiate developer pays rollback or tax increases |
| Property Tax | Increased property taxes on leased and adjacent land | Include lease clause for developer to pay taxes |
| Lease Income | Lease payments are taxable income | Report as income for income tax purposes |
| Personal Property Tax on Equipment | Applicable in some states on solar equipment value | Understand local rules; may be developer’s responsibility |
Landowners should consult with a tax advisor and property tax assessor before entering a solar lease to fully understand local rules and negotiate terms that allocate tax burdens appropriately.
In sum, while solar leases can provide stable income and environmental benefits, they can also cause increases in property taxes and affect existing exemptions, making careful contract negotiation and tax planning essential.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-are-the-potential-tax-implications-for-landowners-entering-into-a-solar-lease/
