November 26, 2024 | by Toni Lewis – Partner, US M&A State and Local Tax, Brian Heard – Managing Director, Property, Kourtney Schott – Director, US M&A State and Local Tax

California’s solar property tax exclusion will not be available for new active solar projects after 1/1/2027. Taxpayers and developers need to make sure they’re prepared in order to take advantage of property tax savings while they can. It is not enough for construction to be completed before January 1, 2027; the system must be active with California Independent System Operator before the end of 2026.

Understanding the Solar Property Tax Exclusion

The California solar property tax exclusion offers significant benefits to infrastructure and renewables investors. For eligible projects (i.e., new construction and considered an “Active Solar Energy System”), this exclusion can potentially increase returns on renewable energy investments to include tax savings.  While certain assets (land, fencing, and other non-solar property) do not qualify for the exclusion, we have historically seen potential tax savings up to 90% – 95% of initial tax estimates for an entire solar project.

The exclusion has been in place for many years and has been renewed by the California legislature many times; unfortunately, that time is coming to an end. The legislature has chosen not to renew the exclusion, which is set to sunset on January 1, 2027.

Historically, the cutoff date for qualifying property was somewhat ambiguous as the legislature had continued to renew the exclusion and the California Board of Equalization (“CBOE”) had not clarified when an active solar energy system must be operating to qualify for the exclusion. However, on August 26, 2024, the CBOE published a Letter to Assessors (“LTA”) clarifying the timing.

Timing Clarification under LTA 2024-31

LTA 2024-31 includes the following provisions:

  • Any new construction completed on prior to January 1, 2027, may qualify for solar exclusion;
  • As construction in progress becomes subject to assessment on the lien date but only construction in progress as of January 1, 2026, qualifies for the solar exclusion;
  • Construction in progress added from January 1, 2026, through December 31, 2026, is not excluded from reassessment unless it is completed before January 1, 2027; and
  • If construction on the active solar system continues into 2027, then the portion of the solar system completed after January 1, 2027, would be assessable and would not be eligible for the exclusion.

Active Solar Energy System

The CBOE’s letter did not include any changes in the exclusion’s requirements for being an Active Solar Energy System, which is also a critical item to consider. It is not enough for construction to be completed before January 1, 2027; the system must be active. This means that the solar property not only needs to be able to generate power, but also must be connected to the grid (usually via California Independent System Operator, or CAISO). To the extent that a system is not connected and active by January 1, 2027, the solar exemption would not apply.

It is anticipated that there will be many solar systems constructed in late 2026 seeking to be activated and connected to the CAISO grid prior to January 1, 2027, which may impact CAISO’s timing and developers should consider adjusting their time to complete construction accordingly.

Additional Considerations

While the solar property tax exclusion offers substantial benefits, it is important to consider the following:

  • Local Regulations: The specific requirements for solar projects in California such as what kind of ancillary property may or may not qualify for the exemption may vary by county.
  • Energy Storage: Battery Energy Storage Systems (“BESS”) may also qualify for the solar exclusion if they are used 100% to store solar energy. To the extent that energy is pulled from the grid and stored, the BESS could be at risk of a partial or full revocation of its exempt property status.
  • Change of Control: Developers should be mindful of any organizational changes in the legal entity holding the solar property, which may be considered a change in control (i.e., triggered by when more than 50% of the capital and profits interests is transferred, whether directly or indirectly). If there is a change in control in the entity holding the solar property, the state of California would revoke the solar exemption.

Leo Berwick has a broad range of experience with the solar exclusion and can assist with providing tailored advice based on your circumstances and assist navigating through the ever-changing California property tax landscape. Brian Heard, Leo Berwick’s Property Tax Leader, has worked on a broad range of infrastructure and renewable energy deals for 24 years and is available to assist with California property tax solar exemption projects. You can contact him at brian.heard@leoberwick.com or 214-215-1681.