Solar energy has been a significant area of focus during the past few years, particularly with increasing concerns related to climate change. As a result, some governments have passed new regulations to incentivize people to take advantage of solar energy, including property tax issues. Recently, Gavin Newsom, the California Governor, signed Bill 267 (from the Senate) into law. The new law keeps the solar exclusion, which is a property tax break for partnerships that own solar energy projects.

According to the bill, the solar exclusion will still apply even after the partnership has flipped and changes have taken place in profits and capital. This can be applied before or in connection with the flip. What do investors and owners need to know?

What Is a Partnership Flip?

A partnership flip is a specific agreement that includes:

  • A maker or developer of solar energy enters into a financial agreement with one or multiple entities that are unrelated.
  • There is an unrelated party that agrees to provide Capital to a partnership in exchange for an interest in tax attributes, including federal tax credits or depreciation.
  • The unrelated party receives tax attributes until the party achieves a specified yield or until a pre-established period of time has passed.
  • At that time, the tax attributes might be reduced or the developer obtains a majority of profit interests and capital in the partnership.

The vast majority of partnerships in the state of California are covered by this definition.

What Is a Solar Exclusion

According to California property tax purposes, solar projects are usually classified as real property. These fall into the category of Prop 13. The growth of the full cash value of the property is capped based on the California Consumer Price index. However, real property is usually revalued when there is a change in owners or if there is new construction in the area.

The property tax benefit for solar projects is excluded from “new construction” projects because there is no corresponding exclusion under the category of “owner change.” The solar exclusion is usually lost when ownership changes, but the bill creates certain exceptions to the rule. This could have major implications for property tax purposes for those with solar energy systems.

What Does the Bill Mean?

The bill guarantees that the solar exclusion will remain available from the inception of the partnership after the flip date. Therefore, this could lead to a property tax break for those with a solar energy system. The solar exclusion will continue even if the sponsor takes advantage of a purchase option through the date of the flip.

Overall, this is a positive development related to solar projects in California. Investors and sponsors should have additional clarity, allowing the solar exclusion to remain available even after the formation of a partnership. It will also remain available after changes and allocation have taken place related to the partnership flip. This can make a significant difference to those who are looking for a way to save money on property taxes.