Tax Benefits of Solar Land Leases for Maryland Landowners in 2025

Leasing land for solar development creates significant income opportunities for Maryland landowners, but understanding the tax implications is essential for accurate financial planning and maximizing after-tax returns. Solar lease income faces different tax treatment than traditional agricultural income, and Maryland offers specific property tax benefits that enhance the value proposition. This comprehensive guide explains federal and state tax considerations, beneficial exemptions, planning strategies, and common pitfalls to avoid when leasing your land for solar energy projects.

How Solar Lease Income is Taxed Federally

The IRS treats solar land lease payments as rental income, which has important implications for tax classification and reporting requirements.

Federal Income Tax Treatment:

Classification as Rental Income:

• Ordinary income: Lease payments taxed at marginal federal income tax rates (10%-37% in 2025)
• Not capital gains: Unlike property sales, ongoing lease income receives no capital gains preference
• Passive income category: Generally classified as passive rental income for tax purposes
• Schedule E reporting: Reported on IRS Schedule E (Supplemental Income and Loss)

Self-Employment Tax Exemption:

Good news for landowners: Solar lease income is typically NOT subject to self-employment tax (15.3%), which applies to active business income.

• Leasing land is considered passive activity, not active trade or business
• No self-employment tax on lease payments saves 15.3% on every dollar
• Saves $15,300 annually on $100,000 lease income compared to farming income
• Exception: If you provide substantial services beyond just leasing land, different rules may apply

Deductible Expenses Against Lease Income:

While solar leases are passive income requiring minimal landowner involvement, certain expenses remain deductible:

• Property taxes: Real estate taxes on leased land fully deductible
• Legal and professional fees: Attorney and CPA costs related to lease negotiation and tax planning
• Interest on property debt: Mortgage interest on land being leased
• Property insurance: Any insurance you maintain on the property
• Accounting and bookkeeping: Costs of tracking and reporting lease income
• Property management: If you hire someone to manage the lease relationship

Important Note: Unlike active farming, you cannot deduct equipment, seed, fertilizer, fuel, or labor costs since the developer handles all operations. Your deductions are limited to property ownership costs and professional services.

Maryland State Income Tax on Solar Leases

Maryland taxes solar lease income as ordinary income, similar to federal treatment, but with state-specific considerations.

Maryland Income Tax Rates (2025):

Total Maryland Tax Burden:

• State tax: 2%-5.75% depending on income level
• County tax: Additional 2.25%-3.2% (24 counties have different rates)
• Combined Maryland tax: Typically 4.25%-8.95% on lease income
• Full tax burden: Federal (10%-37%) + Maryland (4.25%-8.95%) = 14.25%-45.95% total

Maryland Property Tax Benefits for Solar Land

This is where Maryland landowners receive significant benefits. The state provides specific property tax exemptions for solar energy equipment that enhance lease economics.

Maryland Solar Property Tax Exemption:

Maryland law (Tax-Property Article § 7-239) exempts solar energy equipment from county and municipal property taxes.

Key Provisions:

• 100% exemption: All solar panels, racking, inverters, and related equipment exempt from property assessment
• Land assessment unchanged: Underlying land value typically remains at current assessment
• No sunset date: Exemption continues for life of solar installation
• Benefit to developer: Developer saves on property taxes, making project more economical
• Indirect landowner benefit: Savings enable developers to pay higher lease rates

Impact on Land Assessment:

What happens to your property tax bill when land is leased for solar?

• Assessment typically unchanged: Most Maryland counties do not increase land assessment due to solar lease
• Solar equipment not taxed to you: Developer owns equipment, developer benefits from exemption
• Agricultural assessment may continue: Some counties allow continued ag assessment even with solar
• Lease income increases your income tax but not property tax

Example: 100 acres valued at $8,000/acre = $800,000 total. Current property tax of $4,000/year typically continues unchanged even when leased for solar. Without the state solar exemption, the $15-20 million solar installation would add $75,000-$100,000 annually in property taxes - costs that would reduce developer's ability to pay competitive lease rates.

Agricultural Use Assessment Considerations:

If your land currently qualifies for agricultural use assessment (lower valuation), leasing for solar may affect this benefit.

County-Specific Policies:

Action Item: Contact your county assessment office BEFORE signing a solar lease to understand how it will affect your property tax assessment. Consider negotiating lease terms requiring developer to cover any property tax increases.

Estimated Tax Payments and Withholding

Solar lease income typically requires quarterly estimated tax payments since no taxes are withheld from lease payments.

Federal Estimated Tax Requirements:

• Payment threshold: Required if you'll owe $1,000+ in tax not covered by withholding
• Quarterly deadlines: April 15, June 15, September 15, January 15
• Safe harbor rule: Pay 90% of current year tax or 100% of prior year (110% if high income)
• Underpayment penalties: IRS charges interest on insufficient estimated payments

Maryland Estimated Tax:

• Required if state tax liability exceeds $1,000
• Same quarterly deadlines as federal
• Safe harbor: 90% of current year or 110% of prior year
• Interest charges on underpayments

Tax Planning Strategies for Solar Lease Income

1. Maximize Deductible Expenses:

• Professional fees: Attorney costs for lease negotiation are deductible - don't skimp on legal help
• CPA consultation: Tax planning fees fully deductible against lease income
• Property improvements: Repairs to access roads, drainage may be deductible
• Insurance: Maintain adequate liability insurance (premiums deductible)

2. Consider Entity Structure:

For larger lease income or estate planning purposes, consider holding property in specific entities:

LLC Ownership:

• Liability protection: Separates solar lease from personal assets
• Tax flexibility: Can elect partnership or S-corp taxation
• Estate planning: Easier to gift LLC interests to heirs
• No additional tax: Single-member LLC disregarded for tax purposes (same as individual)

Family Limited Partnership:

• Facilitates gifting to children while retaining control
• Potential estate tax valuation discounts
• Income splitting opportunities (within limits)
• Requires professional setup and maintenance

Consult Professionals: Entity structuring has complex tax and legal implications. Work with attorneys and CPAs experienced in agricultural land and solar leases before implementing.

3. Timing Income Recognition:

Cash-basis taxpayers (most individuals) report income when received. Consider timing of payments:

• Annual vs. quarterly payments: Quarterly spreads income more evenly throughout year
• Year-end timing: If possible, structure initial payment timing to optimize tax years
• Lump sum option payments: Accelerates income into early tax years (rarely advisable)

4. Retirement Account Contributions:

Solar lease income enables larger retirement contributions:

• IRA contributions: Up to $7,000 annually ($8,000 if age 50+) for 2025
• SEP-IRA: If you have any self-employment income, can contribute up to 25% of income
• Solo 401(k): If you have side business, contributions up to $69,000 (2025)
• Tax deduction: Reduces current taxable income, defers tax until retirement

5. Charitable Giving Strategies:

Substantial lease income creates opportunities for tax-advantaged charitable giving:

• Donor-advised funds: Contribute lump sum in high-income year, distribute over time
• Conservation easements: May be compatible with solar leases, provides tax deductions
• Qualified charitable distributions: After age 70½, donate IRA funds directly to charity
• Itemized deduction limits: Charitable contributions generally limited to 60% of AGI

Estate Planning and Inheritance Tax Considerations

Solar leases create long-term income streams (20-30 years) that significantly impact estate planning.

Estate Tax Implications:

Federal Estate Tax (2025):

• $13.61 million exemption per person ($27.22 million for married couples)
• Solar leases increase property value (capitalized lease income stream)
• Properties with valuable leases may exceed exemption thresholds
• Exemption scheduled to decrease to ~$7 million per person in 2026 unless extended

Maryland Estate Tax:

• $5 million exemption per person (not indexed for inflation)
• Much lower than federal exemption - more estates subject to Maryland tax
• 16% maximum rate on amounts over exemption
• Solar lease income increases estate value, potentially triggering Maryland estate tax

Inheritance and Step-Up in Basis:

Solar leases remain with the property upon inheritance, creating both opportunities and challenges:

Benefits:

• Step-up in basis: Heirs receive property at fair market value on date of death
• Continued income: Lease payments continue to heirs automatically
• No capital gains: Heirs avoid capital gains tax on appreciation during decedent's life

Challenges:

• Restricted use: Heirs cannot develop or use leased portion during remaining lease term
• Multiple heirs: Lease income must be divided among multiple heirs (creates complexity)
• Sale difficulties: Property with long-term solar lease may be harder to sell or less valuable
• Forced retention: Some heirs may want to keep property, others want to sell

Estate Planning Strategies:

1. Lifetime gifting: Gift property or LLC interests before death to remove from estate (uses gift tax exemption)
2. Life insurance: Purchase policy to provide liquidity for estate taxes or buy out co-heirs
3. Qualified Personal Residence Trust (QPRT): Advanced strategy for removing value from estate
4. Irrevocable trusts: Transfer property to trusts removing from taxable estate
5. Family agreements: Establish clear understanding among heirs about property management

Common Tax Mistakes to Avoid

1. Failing to Make Estimated Tax Payments:

The #1 tax mistake landowners make. Spending entire lease payment without setting aside for taxes results in large tax bills and penalties. Set aside 30-35% of each payment immediately.

2. Not Tracking Deductible Expenses:

Landowners often fail to deduct legitimate expenses (attorney fees, property taxes, insurance) against lease income. Maintain detailed records and consult with CPA annually.

3. Assuming Self-Employment Tax Applies:

Some landowners incorrectly pay self-employment tax on lease income. Solar leases are passive rental income, NOT self-employment income. This mistake costs 15.3% unnecessarily.

4. Ignoring Property Tax Implications:

Not researching how lease affects agricultural use assessment can result in unexpected property tax increases. Always verify with county assessor before signing lease.

5. Inadequate Estate Planning:

Failing to update estate plans after entering substantial solar lease creates family conflicts and potential unnecessary taxes. Review and update plans within 6 months of signing lease.

Working with Tax Professionals

Given the complexity of solar lease taxation, professional guidance is essential.

When to Consult Tax Professionals:

• Before signing lease: CPA should review tax implications and help negotiate tax-favorable terms
• First lease payment year: Establish proper reporting, set up estimated payments
• Annually: Review tax strategy, ensure proper reporting, adjust estimated payments
• Major life events: Marriage, divorce, retirement affecting tax picture
• Estate planning: Work with estate attorney and CPA together

Finding Qualified Professionals:

• Seek CPAs with agricultural tax experience
• Ask for references from other solar lease landowners
• Ensure they're familiar with Maryland-specific rules
• Consider certified specialists (e.g., CPA with Agricultural Tax Specialization)

Summary: After-Tax Economics of Solar Leases

Understanding the complete tax picture is essential for evaluating solar lease proposals.