No More Hustleporn: I used to think the tax incentives in real estate were unparalleled

Tweet by Ankur Nagpal

I used to think the tax incentives in real estate were unparalleled
But my mind was just blown after learning about the economics of investing in solar projects 🤯
Probably the best tax saver out there for anyone with a high W-2 or business owner income
Here's how it works:

Warning: This is a fairly complicated tax strategy
And likely not worth it unless you're at high 6 figures+ in income
But if you are, this can offset hundreds of thousands of dollars in business profits or W-2 income
And earn you a nice income stream on the side
Biden's Inflation Reduction Act (IRA) in 2022 made a massive investment in climate
The act called for $369B in tax incentives for investment in green energy
These incentives are available to everyone
& particularly attractive for high earners who can offset large tax bills
When you invest in a commercial solar project, you get 3 big benefits:
- A federal tax credit
- Depreciation on the project that can reduce income to offset federal + state taxes
- Income from the solar project (roughly 5% of investment value)
Let's go through an example:
If I invest $1M in a commercial solar project:
Most commercial solar projects today have an immediate 40% tax credit
That's $400K in tax credits right there
Tax credits directly reduce your tax bill (not your taxable income) so are insanely valuable
$400K less in taxes
Tax credits have so many benefits:
- You can claim them for taxes already paid for the last 3 years
- They can be carried over for 20 years if you don't use them
- You can sell tax credits: they trade for ~90 cents on the $
The tax credit percentage will also increase soon!
On to the second benefit, depreciation
Depreciation is the amount of value that a physical asset loses over time
This provides a tax benefit as you can use this as a deduction & reduce your taxable income by this amount
Commercial solar has very attractive depreciation!
For federal taxes, you can depreciate the entire value minus half the tax credit over 5 years
So in the example above, you can depreciate 80% over 5 years
And via bonus depreciation, depreciate 80% in the first year
So that'd reduce your taxable income by $640,000 in Year 1!
Bonus depreciation allows you to front-load the depreciation & take more of it in Year 1
Without it, you'd depreciate the value evenly over 5 years
But bonus depreciation at 80% lets you claim 80% of the value Year 1, and the rest over subsequent years
Big upfront cash savings
If you live in a state with taxes:
For state taxes, you can depreciate the entire value over 5 years
Some states also follow bonus depreciation
In a high income tax state like New York, you could end up with $100K+ in lifetime state tax savings on the $1M project over 5 years
And now, the third benefit - an income stream
Most commercial solar projects under the IRA include 20 year income streams
This is tied to the solar energy produced by the project & around ~5% of the investment
So it'd pay another $50K a year for the lifetime of the project
Let's bring it all together
Your $1M investment in the solar project gets:
- A $400K federal tax credit
- ~$640K of federal depreciation Year 1 or $300K in tax savings at top bracket
- ~$800K of state depreciation or $100K+ in tax savings in NY
- $50K in income every year!
That is INSANE
And if you were so inclined, you could apply leverage here as well
(Look up a flip partnership)
You can use the 5% income stream to finance debt to add leverage to the project
This would actually save much more in taxes than what you spend
Mind blowing 🤯
Caveat #1:
To qualify for the tax credit, you have to be an "active investor"
This means between you & your spouse you have to spend 100 hours a year or 8 hours a month on the project
But lots of ways to qualify - touring the site, conferences, events, meetups etc.
Caveat #2:
If you have high W-2 income, depreciation is capped at $289K / year single or $578K / couple
But you can apply the excess amount in future tax years
But if you are a business owner, there is no limit at all to the amount of depreciation you can apply
OK, I'll stop here - this thread has gotten complicated enough
But after @ManiMahadevan explained this to me, it blew my mind & I wanted to share it with other business owners
If y'all are interested / want more, we can host a workshop going through this on a live call!
OK, we finally have a date and time for the workshop
Two weeks from tomorrow, Thursday June 29th at 2PM ET
It's totally free to attend & we'll send a replay to everyone on the list…  
Let me know if there are specifics we should cover