For a rooftop system installed in 2026, the California solar tax credit picture is largely empty: no federal income tax credit, and no state income tax credit either. The federal Residential Clean Energy Credit, which covered 30% of installation costs, expired for any system placed in service after December 31, 2025.1Internal Revenue Service. Residential Clean Energy Credit California has never offered its own income tax credit for solar. What remains is a property tax exclusion that keeps your home’s assessed value from rising because of the panels, and it is scheduled to sunset on January 1, 2027.2California State Board of Equalization. Active Solar Energy System Exclusion If you installed a system in 2025 or earlier and could not use the full 30% credit that year, you can still carry the unused portion forward.
The Federal Credit Ended December 31, 2025
Section 25D of the tax code let homeowners claim 30% of the cost of a qualifying solar electric system as a dollar-for-dollar reduction in federal income tax. The Inflation Reduction Act of 2022 had extended the 30% rate through 2032, with step-downs to 26% in 2033 and 22% in 2034. That schedule was cut short. The IRS now states the credit “is not available for any property placed in service after December 31, 2025.”1Internal Revenue Service. Residential Clean Energy Credit
The trigger is when the system is placed in service, not when you signed the contract or paid a deposit. A homeowner who signed in 2025 but did not have an operational system until 2026 gets nothing from the federal credit. The same expiration applies to related clean energy property that previously qualified under Section 25D, including solar water heaters, small wind turbines, geothermal heat pumps, and battery storage.
Two boundaries worth stating plainly. California has no separate state income tax credit that fills the gap, and it never did. And leased panels or power purchase agreements, where a company owns the equipment on your roof and sells you the electricity, never qualified for the homeowner’s credit in the first place; the credit applied only to systems you owned.1Internal Revenue Service. Residential Clean Energy Credit
Carrying Forward Unused Credit From a 2025 or Earlier Installation
The Residential Clean Energy Credit is nonrefundable. It can reduce your federal tax bill to zero but cannot generate a cash refund on its own. If the credit was larger than the tax you owed in the installation year, the excess does not disappear: it carries forward.1Internal Revenue Service. Residential Clean Energy Credit The IRS Form 5695 instructions confirm that taxpayers may carry the unused portion of a 2025 credit into 2026, or bring forward a carryforward from 2024.3Internal Revenue Service. Instructions for Form 5695 (2025)
An example makes the arithmetic concrete. A $30,000 installation placed in service in 2025 generated a $9,000 credit. If you owed only $5,000 in federal tax that year, $5,000 zeroed out your bill and the remaining $4,000 rolls into your 2026 return. File Form 5695 even for years when you cannot use the full amount, so the IRS has a record of the carryforward.
How to Claim the Carryforward on Form 5695
Complete Part I of IRS Form 5695 and attach it to your Form 1040 or Form 1040-SR.4Internal Revenue Service. Form 5695 (2025) Residential Energy Credits The credit flows to Schedule 3, line 5a, and reduces your total tax for the year. Electronic filing typically processes within 21 days.5Internal Revenue Service. Processing Status for Tax Forms
Hang on to your original installation records. The IRS recommends keeping purchase receipts and installation records, which may also matter for calculating your adjusted basis if you sell the home.6Internal Revenue Service. How to Claim a Residential Clean Energy Tax Credit The records that matter most are the total cost of the system (parts, labor, wiring, and piping), the date it was placed in service, and the manufacturer’s certification that components met federal energy standards.3Internal Revenue Service. Instructions for Form 5695 (2025)
What Counted as a Qualified Expense
If you are calculating a carryforward or amending a prior return, the cost categories still matter. Qualified expenses included the solar panels themselves, labor for on-site preparation and installation, and wiring or piping needed to connect the system to the home.1Internal Revenue Service. Residential Clean Energy Credit
Several common costs did not. Roof trusses, traditional shingles, and other structural components that primarily serve a roofing function could not be included, even when the work was necessary to support the panels. Solar roofing tiles and solar shingles were the exception, because they generate electricity themselves. Loan interest and origination fees were also excluded. State or utility rebates that qualified as purchase-price adjustments under federal tax law had to be subtracted from the total cost before applying the 30% rate; incentives that did not meet the rebate definition could be included in gross income instead.1Internal Revenue Service. Residential Clean Energy Credit The system also had to be new, or used for the first time at your residence.
California’s Property Tax Exclusion for Solar
The one California-specific tax break for a new residential system is not an income tax credit. Under Revenue and Taxation Code Section 73, an active solar energy system installed on your home is excluded from the definition of “newly constructed” improvements. Your county assessor will not raise your property’s assessed value because of the solar installation.7California Legislative Information. California Revenue and Taxation Code 73
The exclusion lasts as long as you own the home. Once the property changes hands, the new owner loses the solar-specific exclusion and the home may be reassessed at its full market value, including the solar installation.7California Legislative Information. California Revenue and Taxation Code 73 Annual savings depend on your home and local tax rate, but avoiding a reassessment on a $20,000 to $25,000 system adds up over the life of the panels.
The catch is the sunset date. The exclusion is scheduled to end on January 1, 2027.2California State Board of Equalization. Active Solar Energy System Exclusion Systems that qualify before that date keep the benefit even after the sunset, until a change in ownership.7California Legislative Information. California Revenue and Taxation Code 73 Installing and getting the system operational before January 1, 2027, locks in the exclusion for as long as you own the home. Wait until after that date and you may face a higher property tax bill on top of losing the federal credit.