Solar Tax Credits and Incentives in California 2026: What Still Qualifies After the Federal Purchase Credit Expired

The federal Investment Tax Credit used to be the largest financial incentive available to a California homeowner buying a solar system, but Section 25D, the residential purchase credit, expired for expenditures after December 31, 2025. A system you buy with cash or a loan in 2026 gets no federal tax credit. The 30% rate still exists under Section 48E, but only the system owner can claim it, which is why it remains available through a PPA or lease (some providers reflect part of that value in the rate, a business decision on their end) or for a business that owns its own solar. What has not changed: California still adds a permanent property tax exclusion, a partial sales tax exemption on equipment, the SGIP battery rebate program, income-based assistance programs, and NEM 3.0 billing that still rewards self-consumed solar production.

Most homeowners hear about one or two of these programs during a sales appointment, and some installers are still quoting the old 30% purchase credit out of habit or worse. The other incentives get mentioned in passing or skipped entirely. That means homeowners sign contracts without a complete picture of what their installation is actually worth after stacking every available benefit, or worse, based on a credit that no longer exists.

This guide covers what happened to the federal credit, who can still claim the Section 48E version and how, and walks through every California-specific incentive layer that remains. At the end, we run the actual numbers for a Temecula homeowner on a $30,000 purchased system to show what a 2026 purchase actually costs after the incentives that still apply.

The Federal Solar Investment Tax Credit in 2026: Expired for a Purchase, Still Alive for a PPA, Lease, or Business

The Investment Tax Credit for a homeowner-owned system was authorized under Internal Revenue Code Section 25D, the Residential Clean Energy Credit. It let a homeowner reduce federal income tax liability by 30% of the total qualified cost of installing a solar electric system at a primary or secondary residence, for systems placed in service from January 1, 2022 through December 31, 2025. The One Big Beautiful Bill Act, signed July 4, 2025, repealed Section 25D outright for expenditures after that date. There was no gradual step-down: a system you buy with cash or a loan in 2026 gets no federal tax credit at all.

The 30% rate did not disappear entirely. It still exists under Section 48E, the credit used by a business that owns its own solar and by a PPA or lease provider, who may reflect part of that value in the monthly rate - a business decision, not something this site can promise. For a project that begins construction after July 4, 2026, Section 48E requires the system be placed in service by December 31, 2027 to qualify. A homeowner who wants 30% off the value of their system in 2026 needs to go through a PPA or lease, or verify whether their installer offers a structured pass-through; a straightforward cash or loan purchase does not qualify.

For a homeowner with an unused carry forward from a system placed in service on or before December 31, 2025: that credit is non-refundable. It reduces tax liability to zero but does not generate a refund check if the credit exceeds what you owe. Any unused portion carries forward to subsequent tax years with no expiration. A homeowner with $6,000 in annual federal tax liability who claimed a $9,000 credit in the year of installation would have consumed $6,000 in Year 1 and automatically carried $3,000 forward to the following year.

There was no income limit to qualify for the residential credit while it existed, and there is no income limit under Section 48E either. The difference now is entirely about who owns the system: a homeowner buying outright in 2026 gets nothing, while a PPA/lease provider or a business owner still gets the full 30%.

What Costs Qualified for the 30% Credit (Now Relevant Only to Section 48E)

This cost breakdown still matters for whoever can actually claim the 30% credit in 2026: a PPA/lease provider or a business owner under Section 48E, or a homeowner with a carry forward from a system placed in service on or before December 31, 2025. The credit applies to the full installed cost of the system, not just the equipment itself. Every major cost category associated with getting the system operating qualifies, with a few exceptions. Here is a full breakdown of what is and is not included.

One important nuance, relevant only under Section 48E (PPA/lease or business ownership) or to a pre-2026 carry forward: if a battery is installed alongside solar panels in the same project, the full cost of the battery is included in the credit basis. A homeowner purchasing a battery in 2026, whether alongside new solar or added later, gets no federal credit on it at all, since Section 25D expired.

How the ITC Was Claimed on IRS Form 5695 (For a System Placed in Service by December 31, 2025)

If your system was placed in service on or before December 31, 2025, you claimed the federal Investment Tax Credit by filing IRS Form 5695 (Residential Energy Credits) for that tax year, and the credit flowed through Schedule 3 to Form 1040. This process still matters if you have an unused carry forward balance. Form 5695 does not apply to a system purchased in 2026, since Section 25D no longer covers that expenditure. Here is the step-by-step process as it worked for an eligible installation.

Battery Storage and the Federal Credit in 2026: No Credit for a Purchase

Battery storage was eligible for the full 30% credit under Section 25D, regardless of whether the battery was installed with solar or separately, for any expenditure made on or before December 31, 2025. That credit expired at the end of 2025 along with the rest of Section 25D. A battery purchased with cash or a loan in 2026, whether installed with new solar or added to an existing system, gets no federal tax credit.

Before that date, installing a battery at the same time as solar panels as part of a single integrated project meant 100% of the battery cost qualified for the credit with no additional conditions. A standalone battery added separately also qualified, provided it was charged at least 70% from solar during its first year of operation.

For a homeowner going through a PPA or lease in 2026, the battery can still be part of the package the provider owns, so the Section 48E credit the provider claims is reflected in the monthly rate rather than in a homeowner tax filing. For Temecula homeowners under NEM 3.0, pairing battery storage with solar remains the financially strongest configuration on the merits: it lets you capture surplus midday solar production and deploy it during SCE's peak evening hours when rates are highest, independent of what happens to the federal credit.

California State Income Tax: No State Solar Credit (But No State Tax on SGIP Either)

California does not have a state income tax credit for residential solar installations. The state's solar incentive structure is built around exemptions and rebates rather than tax credits. This surprises many homeowners who assume California's strong solar policy translates to a matching state tax benefit - it does not.

What California does offer is a favorable tax treatment of the SGIP rebate. For most homeowners, the SGIP battery rebate is treated as a reduction in the cost basis of the battery system rather than as taxable income. Under the federal tax code, government incentive payments that reduce the basis of a capital asset are generally not treated as gross income. However, the California Franchise Tax Board's treatment of SGIP rebates can depend on the tier and program year, and this is an area where the tax treatment has evolved. Consulting a California tax professional before your first filing after SGIP receipt is recommended.

The practical takeaway: California homeowners benefit from the SGIP rebate without a meaningful state income tax penalty, the property tax exclusion, and the partial sales tax exemption, regardless of what happened to the federal purchase credit. The absence of a state income credit is offset by these other programs, particularly the property tax exclusion, which has meaningful long-term value. A homeowner going through a PPA or lease also benefits indirectly from the federal Section 48E credit, since the provider reflects its value in the rate.

SGIP Battery Rebate: Tiers, Amounts, and How to Apply

The Self-Generation Incentive Program (SGIP) is administered by the California Public Utilities Commission and funded through ratepayer surcharges on SCE, SDG&E, PG&E, and SoCalGas bills. It pays cash rebates for battery storage systems installed at homes and businesses. For Temecula homeowners, the applicable utilities are Southern California Edison (SCE) and San Diego Gas and Electric (SDG&E) depending on your address.

SGIP is structured in incentive steps. As each step fills, the rebate per kilowatt-hour decreases. Current standard residential rebates in 2026 are approximately $150 to $200 per kWh of installed battery capacity. A single 13.5 kWh Tesla Powerwall would generate approximately $2,025 to $2,700 in standard SGIP rebates. A 27 kWh system (two Powerwalls) would generate roughly $4,050 to $5,400. Applications are processed first-come, first-served and some steps have waitlists.

To apply for SGIP, your solar installer typically handles the application on your behalf after installation. The rebate is paid directly to the customer or applied as a credit against the system balance depending on how your contract is structured. Confirm with your installer before signing whether SGIP is included in their proposal and who files the application.

One important interaction, relevant only under Section 48E or a pre-2026 carry forward: if the credit still applies to your ownership structure and you receive an SGIP rebate, the rebate must be subtracted from the gross system cost before calculating the 30% credit. A $30,000 system with a $2,500 SGIP rebate has a credit basis of $27,500, generating a credit of $8,250 rather than $9,000. For a straightforward homeowner purchase in 2026, this ordering rule no longer matters, since there is no federal credit to calculate at all; SGIP still reduces net system cost on its own.

California Property Tax Exemption Under AB 1451

California Revenue and Taxation Code Section 73, made permanent by AB 1451, excludes solar energy systems from property tax reassessment. When you install solar, your county assessor cannot increase your property's assessed value based on the solar equipment alone. The panels, inverter, racking, and associated wiring are all excluded from reassessment.

This matters because solar adds real market value to your home. Research from Lawrence Berkeley National Laboratory found California buyers pay approximately $4,000 per kilowatt of installed solar capacity. An 8kW system adds approximately $32,000 in market value. Without the exemption, Riverside County's combined property tax rate of roughly 1.1% would translate to an additional $352 per year in property taxes - about $8,800 over a 25-year panel warranty period. The exemption eliminates that cost entirely.

The exclusion is self-executing. You do not need to apply. The Riverside County Assessor is aware of the statute and will not factor solar into your reassessment. Battery storage systems installed as part of a solar project are also covered. The exclusion does not apply to a roof replacement performed before or during the installation, even if the roof was in poor condition and the installation prompted the replacement.

If you receive an assessment notice that appears to include solar equipment, file a formal exclusion claim with the Riverside County Assessor citing California Revenue and Taxation Code Section 73. Include your installation date and a copy of the permit.

California Sales Tax Exemption on Solar Equipment

California Revenue and Taxation Code Section 6356.5 provides a partial sales and use tax exemption for solar energy equipment. The exemption removes 3.9375 percentage points from the applicable state sales tax rate. In Temecula, where the combined sales tax rate is 8.75%, eligible solar equipment is taxed at approximately 4.8125% rather than the full rate.

The exemption applies to the equipment portion of a solar installation - panels, inverters, and racking - not to labor, design, or permitting charges. Your installer claims the exemption on their sales tax return. A properly structured invoice will separate equipment costs from labor costs. On a $30,000 system where equipment represents roughly 65% of the total ($19,500), the savings from the partial exemption are approximately $767 in Temecula - already reflected in your installer's pricing if they are handling it correctly.

When reviewing proposals, ask each installer whether the sales tax exemption is already factored into their quoted price. The answer should be yes. If an installer is not applying the exemption, they may be structuring the transaction incorrectly, which affects both their tax compliance and your total cost.

NEM 3.0 and How It Affects Your Solar Economics

Net Energy Metering 3.0 is the current billing framework for California homeowners who install solar. It replaced NEM 2.0 for new applications after April 15, 2023. NEM 3.0 is not a tax credit or rebate - it is a billing structure that determines how much SCE or SDG&E credits you for solar electricity you send to the grid.

The key difference from NEM 2.0: export credits under NEM 3.0 are significantly lower, averaging $0.03 to $0.08 per kWh compared to retail rates that exceed $0.30 per kWh under NEM 2.0. Homeowners who export a large share of their solar production to the grid see meaningfully lower bill savings under NEM 3.0.

For homeowners who consume most of their solar power as it is generated - through air conditioning, EV charging, pool pumps, and daytime appliance use - NEM 3.0 still delivers strong savings because self-consumed solar avoids retail electricity costs entirely. The economics shift primarily for homeowners with low daytime electricity consumption who historically exported 40% or more of their production.

Battery storage largely restores NEM 3.0's financial value. A battery captures surplus midday solar production and shifts it to the evening peak hours when SCE Time-of-Use rates are highest (typically $0.40 to $0.55 per kWh from 4pm to 9pm). Self-consuming battery-stored power at peak rates is significantly more valuable than exporting it at NEM 3.0 export credit rates. This is why the financial case for battery storage is stronger under NEM 3.0 than it was under NEM 2.0.

Low-Income Solar Programs: SASH and MASH

California operates two income-based solar programs administered through the Center for Sustainable Energy: the Single-family Affordable Solar Homes (SASH) program and the Multi-family Affordable Solar Homes (MASH) program. Both are funded through the California Solar Initiative and target households that would otherwise lack access to solar's financial benefits.

SASH provides upfront incentives and bill credits to income-qualified homeowners who own a single-family residence and meet California Alternate Rates for Energy (CARE) program eligibility. The program is administered by Grid Alternatives, a nonprofit installer, and typically serves households at or below 80% of the Area Median Income. In Riverside County, current SASH incentives can cover a substantial portion of total system cost for qualifying households on their own; a household that owns the system outright in 2026 no longer has a federal credit to stack on top, since Section 25D expired December 31, 2025.

MASH provides incentives for solar installed on affordable multifamily housing properties where the solar production benefits low-income tenants. It is primarily a program for property owners rather than individual tenants.

To check SASH eligibility, contact Grid Alternatives directly or visit their website. Eligibility is determined by income, utility account status, and property ownership. Waitlists exist in high-demand areas. If the household's SASH-assisted system is structured as a PPA or lease, the provider's Section 48E credit still applies; a straightforward SASH purchase has no federal credit to combine with it.

How to Stack the Incentives That Still Apply in 2026

For a homeowner buying a system outright in 2026, three incentives remain stackable: the SGIP battery rebate, the property tax exclusion, and the partial sales tax exemption. The federal credit no longer applies to that purchase, since Section 25D expired December 31, 2025. A homeowner going through a PPA or lease instead benefits from the Section 48E credit indirectly through the rate, on top of the same California-administered incentives. These programs are administered by different agencies (CPUC, county assessor, California Board of Equalization, and for a PPA/lease the IRS) and do not interfere with each other.

Example Calculation: Temecula Homeowner Purchasing a $30,000 System in 2026

To show what a straightforward cash-or-loan purchase actually costs after the incentives that still apply, here is a real calculation for a Temecula homeowner buying a solar system with battery storage in 2026. This example does not include a federal tax credit, since Section 25D expired December 31, 2025 and a homeowner purchase does not qualify for Section 48E.

In this example, the combination of the SGIP rebate and the sales tax exemption reduces the effective first-year cost of a $30,000 system to approximately $26,869 before financing costs. That is $8,291 more than this homeowner would have paid if the same system had been placed in service on or before December 31, 2025 and qualified for the 30% federal credit. The property tax exclusion adds a further $11,000 in cumulative savings over the system's 25-year warranty period - savings that never appear on any installer proposal but are real and guaranteed by California law. A homeowner who instead chooses a PPA or lease does not pay this $30,000 upfront at all, and the provider's Section 48E credit is reflected in the monthly rate.

On top of these incentives, the system's electricity generation displaces SCE grid power at retail rates, and the battery shifts stored solar to SCE peak hours. Depending on your household's electricity consumption pattern, annual utility bill savings typically range from $1,800 to $3,200 for an 8kW system with battery storage in Temecula's climate.

Common Mistakes to Avoid With the Federal Credit in 2026

Deciding How to Go Solar in 2026, Now That the Purchase Credit Is Gone

The federal purchase credit already expired, so there is no remaining "act before it steps down" pressure on that front for a homeowner buying a system. The decision that actually matters now is ownership structure: a full-price purchase, or a PPA/lease that still carries the 30% Section 48E credit through the provider's rate. If a PPA or lease begins construction after July 4, 2026, the provider needs the system placed in service by December 31, 2027 to keep that credit, which is worth confirming with them directly.

SCE rates have increased every year since 2020 and are projected to continue rising. Every month you delay installing solar, under any ownership structure, is another month of paying retail electricity rates that the solar system would have displaced.

SGIP battery rebates move in steps and are funded by the CPUC on a rolling basis. The program has experienced waitlists in prior years. There is no guarantee that current rebate levels persist into 2027. Applying while funds remain available at current steps is the conservative approach, and SGIP is unaffected by the federal credit's expiration.

NEM 3.0 economics are also known quantities now. Homeowners who were waiting to see how NEM 3.0 would perform in practice now have several years of real-world data from early adopters. Battery-paired solar systems are performing as projected in Temecula's climate profile, and the economics are well-understood enough to make an informed decision today, whichever ownership structure fits your situation.

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