The IRS June 20, 2016 update on deductible taxes includes language that clarifies an issue which has been a source of confusion and disagreement among many in the PACE community: whether or not all or a portion of a property owner’s PACE payment may be deducted from one’s income tax. The IRS finds that subject to various restrictions, the interest portion of a PACE payment can be treated as a deduction to personal income taxes.
Here is the relevant excerpt from the IRS guidance, which can be found at https://www.irs.gov/taxtopics/tc503.html:
Deductible real estate taxes are generally any state, local, or foreign taxes on real property levied for the general public welfare. The charge must be uniform against all real property in the jurisdiction at a like rate.
There are popular loan programs that finance energy saving improvements through government-approved programs. You sign up for a home energy system loan and use the proceeds to make energy improvements to your home. In some programs, the loan is secured by a lien on your home and appears as a special assessment on your real estate property tax bill over the period of the loan. The payments on these loans may appear to be deductible real estate taxes; however, they are not deductible real estate taxes. Assessments associated with a specific improvement benefitting one home are not deductible. However, the interest portion of your payment may be deductible as home mortgage interest. Refer to Publication 936, Home Mortgage Interest Deduction, to see whether you might qualify for a home mortgage interest expense deduction.
The June IRS guidance provides clarity for PACE providers, contractors, investors, state and local government officials, and most importantly for participating property owners. The guidance also solidifies PACE’s position as one of the most economically competitive financing tools for home energy and water upgrades – interest rates comparable to and often better than Home Equity Loan rates, repayment terms aligned with the useful life of eligible measures, and the possibility of interest payments being tax deductible. PACENation’s Consumer Protection Policies advises all PACE programs to refer their clients to their tax preparers on eligibility for tax deductions and related questions.