Solar ITC recapture: the 5-year rule, the 20% per year schedule, and who pays

By the Tax Field Guide editorial team. Published 2026-10-26. Facts checked 2026-10-26. Related strategies: Solar Investment Credits, Purchased Energy Credits.

Education only; not tax, legal or investment advice. Tax rules change, and how they apply depends on your facts. No outcome is guaranteed.

An investment tax credit (ITC) is claimed up front, but it is not fully "earned" until the property has been used for 5 full years. If something happens during that window, part or all of the credit can be recaptured: added back to your tax. Recapture is reported on Form 4255.¹

What triggers recapture

According to the Form 4255 instructions, you generally must refigure the credit and may have to recapture some or all of it if, before the end of 5 full years after the property was placed in service, any of the following happens:¹

• you dispose of the property;
• you change its use so it no longer qualifies, or its business use falls;
• your proportionate interest in a partnership or S corporation that allocated the basis to you is reduced by more than one-third;
• you return leased property to the lessor;
• there is a net increase in "nonqualified nonrecourse financing" on property subject to the at-risk rules;² or
• for credits increased for meeting the prevailing wage requirements, prevailing wages are not paid for alteration or repair work during the 5-year period.

How much is recaptured

The recapture percentage depends on the number of full years the property was in service:¹

Unused carryforwards of the credit are reduced by the same percentage, and the property's basis is increased by 50% of the recaptured amount for energy property and clean electricity investment property.¹³

Exceptions

Recapture does not apply to a transfer because of death, a transfer between spouses or incident to divorce (although the spouse who receives it inherits the exposure), certain corporate acquisitions, or a mere change in the form of conducting the business if the property stays in the business and you keep a substantial interest.¹

If you bought the credit

When a credit was transferred under §6418, the seller must notify the buyer of a recapture event, and the buyer generally calculates and owes the recapture on the transferred credit.¹⁴ That is one reason buyers ask for indemnities or tax credit insurance. See buying transferable solar credits and questions to ask a tax credit broker.

Why recapture matters for solar pitches

Watch for arrangements that are designed to unwind early, such as equipment that is "sold back" or abandoned within a few years. An early disposition can trigger recapture. Also watch for the three red flags on the solar ITC strategy page: zero-down or no-money-out-of-pocket pitches, 0% or below-market seller financing, and equipment valued well above retail or market price.

Common questions

How long do you have to keep solar equipment to avoid ITC recapture?

Five full years after it is placed in service. The recapture percentage is 100% in the first year and falls by 20 points for each full year, reaching 0% after 5 full years.

Who pays recapture on a transferred credit?

Generally the buyer. The seller must notify the buyer of a recapture event, and the buyer computes and owes the recapture attributable to the transferred credit.

Does selling a partnership interest trigger recapture?

It can. Reducing your proportionate interest in a partnership or S corporation by more than one-third within the recapture period is a recapture event.

Education only; not tax, legal or investment advice. Talk to a qualified professional before acting.

Sources

1. IRS, Instructions for Form 4255 (12/2025), https://www.irs.gov/instructions/i4255
2. 26 U.S.C. §49, https://www.law.cornell.edu/uscode/text/26/49
3. 26 U.S.C. §50 (recapture §50(a); basis adjustment §50(c)), https://www.law.cornell.edu/uscode/text/26/50
4. 26 U.S.C. §6418, https://www.law.cornell.edu/uscode/text/26/6418