On August 26, 2024, the California Board of Equalization ("BOE") issued guidance to County Assessors regarding the sunset date of the active solar energy exclusion from California property taxes.
Under California's real property tax law, when something of value is physically added to real property, what is added is considered "new construction" and is subject to assessment for property tax purposes. The addition or modification will be assessed at current market value1 and this value will be added to the existing base year value of the underlying real property.
In 1980, voters approved an amendment to the California Constitution, giving the Legislature the authority to exclude the construction of certain active solar energy systems from property tax assessments. Accordingly, under Section 73 of the Revenue and Taxation Code, the installation of a qualifying active solar energy system will not result in either an increase or a decrease in the property tax assessment of the underlying real property. The active solar energy system exclusion generally remains in effect for a particular system until a change in ownership of the active solar energy system occurs.
The active solar energy system exclusion was initially set to sunset in 1985 but has been extended on multiple occasions. Under the current text of Section 73, the active solar energy system exclusion will only apply until the 2025–26 fiscal year, and will be repealed as of January 1, 2027, absent another extension. The BOE's recent guidance addresses how the sunset dates under Section 73 will be applied.
In its guidance, the BOE confirms that any active solar energy system that is completed before January 1, 2027, will qualify for the active solar energy system exclusion, and the exclusion will remain in effect until there is a subsequent change in ownership of the property (where the value of the solar energy system would be included in the overall purchase price and the new assessed value). Therefore, any new construction of an active solar energy system that is completed before January 1, 2027, will enjoy the full benefit of the current exclusion.
For any active solar energy system where construction is still in progress, but has not been completed, before January 1, 2027, the rules are slightly different and depend on the date that construction has commenced. According to the BOE, only construction that is in progress before 12:01 a.m. on January 1, 2026, can qualify for the exclusion. The BOE's reasoning is based on the general principles of California property tax law as they apply to new construction. Specifically, "construction in progress" (i.e., construction that has started but is not yet completed) is only subject to assessment for property tax purposes as of January 1 each year. The BOE reasons that until property is subject to assessment under general California property tax law, such property cannot qualify for an exclusion from assessment, like the active solar energy system exclusion. Therefore, according to the BOE, the active solar energy system exclusion cannot apply to the construction in progress that begins after January 1, 2026, and is not complete prior to January 1, 2027, because such construction would not be subject to assessment for California property tax purposes prior to the January 1, 2027, repeal date. In contrast, because new construction is fully assessed upon completion under California property tax law, any new construction that is completed prior to January 1, 2027 (regardless of the commencement date) can qualify for the active solar energy systems exclusion because this new construction is subject to assessment before the exclusion is repealed.
Below are a few examples of how the BOE's guidance can apply in practice:
- Construction that is completed prior to January 1, 2027: Construction of an active solar energy system begins in September 2025, and is completed in September 2026. Because construction was completed prior to January 1, 2027, the entire active solar energy system will be excluded from assessment under the active solar energy system exclusion. The active solar energy system will not be subject to assessment until there is a change in ownership.
- Construction in progress prior to January 1, 2027: Construction of an active solar energy system begins in September 2025, but is not completed until February 2027. The construction in progress as of January 1, 2026, will be excluded under the active solar energy system exclusion.
On January 1, 2027, the construction that took place between January 1, 2026, and the end of the year will be valued and added to the property tax rolls. Because such construction was not subject to assessment prior to the January 1, 2027, repeal date it does not qualify for the exclusion.
On the date of completion in February 2027, the assessor will establish a final base year value for the portion of the active solar energy system completed from January 1, 2026, to February 2027. This base year value will be enrolled and subject to property tax. The construction that occurred prior to January 1, 2026, will continue to be excluded from assessment until there is a subsequent change in ownership.
- Construction that begins after January 1, 2026, but is completed before January 1, 2027: Construction of an active solar energy system begins in February 2026, and is completed in October 2026. The entire active solar energy system will be excluded from assessment until there is a subsequent change in ownership. The fact that the construction did not commence until February 2026 is irrelevant since the active solar energy system was completed prior to January 1, 2027.
As noted above, the active solar energy system exclusion has been extended on multiple occasions since 1985. While the current repeal date is set for January 1, 2027, it is possible that the California legislature will decide to extend the exclusion beyond 2027. We will keep you updated as we learn more about the upcoming sunset date, but please do not hesitate to contact us directly if you have any questions or would like to discuss how the BOE's guidance can impact your active solar energy system projects.
Footnote
1 Generally, the term "market value" refers to the amount of cash or its equivalent that the property in question would sell for in the open market. County Assessors are tasked with determining market value for all property within such county's jurisdiction for property tax purposes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.