Property With a Solar Lease, PPA or PACE Lien: What Transfers and What Counts as Debt

Panels you own are part of the real property you sell; panels you lease are not yours to sell

The exchange regulations define real property to include inherently permanent structures, and Reg. section 1.1031(a)-3(a)(2)(ii)(C) lists "power generation and transmission facilities" among them when permanently affixed. Systems that serve a building can also be structural components, which the same regulation treats as real property only if you own them together with the building space they serve.

That analysis applies only to equipment you own. Under a solar lease or power purchase agreement, the provider owns the panels and you buy their output or pay for their use. They are not part of your relinquished property, and the contract is an obligation the buyer has to accept.

If you claimed an energy credit on panels you own, section 50(a) recaptures part of it if you sell within five full years of placing them in service, and a 1031 exchange does not prevent that; exchanging a property with historic or other credits sets out the table.

A solar lease or PPA moves only if the buyer and the provider both agree

Solar contracts usually require the provider's approval of any transferee, and some buyers will not take on a long fixed payment for equipment they did not choose. When the buyer refuses, the usual alternatives are a buyout of the contract by the seller or removal of the system, both of which cost money at or before closing.

Start this early. A transfer approval that is still pending at closing can push the date back, and while your 45 days start only at transfer under Reg. section 1.1031(k)-1(b)(2), a delayed sale is a problem if your replacement is already under contract.

A buyout you pay from your own funds before closing does not touch the exchange. If it is paid on the settlement statement, ask your CPA how the payment is characterized, since it is not one of the ordinary closing items the regulations list.

A PACE assessment is a lien on the property, and lenders and buyers treat it that way

Property assessed clean energy financing pays for energy or resilience improvements and is repaid through a special assessment on the property tax bill. In Florida, section 163.081 requires the recorded financing agreement to give constructive notice that the assessment "constitutes a lien of equal dignity to county taxes and assessments from the date of recordation."

Florida also requires a seller of residential or commercial property with an unpaid assessment to give the buyer a written disclosure at or before signing the contract, and section 163.082 requires written consent from existing mortgage holders before commercial PACE financing is placed. Federal law treats residential PACE as credit: 12 CFR 1026.43 defines a PACE transaction and applies ability-to-repay rules to it.

Because the lien ranks with taxes, a buyer's lender may require payoff as a condition of its loan. Check the program's rules on whether the balance can transfer and what payoff costs.

Paying the PACE balance at closing is the clean exchange answer; an assumed balance is a CPA question

When the assessment is paid off on the settlement statement, it works like any other lien payoff: the intermediary receives less cash, and the balance you were relieved of is part of the debt you replace. Reg. section 1.1031(d)-2 treats liabilities to which the transferred property is subject as money received, and new debt or added cash on the replacement offsets it.

If the buyer instead takes the property subject to the remaining assessment, we found no published IRS guidance on whether that balance is a liability for the exchange netting or a tax-like charge that simply reduces the price. The conservative plan is to treat it as liability relief and replace it, and to have your CPA choose the reporting position before closing.

For tax deductions on a property you keep, Publication 527 says charges for local benefits that increase the property's value are added to basis rather than deducted. Whether a particular PACE payment fits that rule depends on the program; ask your CPA.

Worked example: a commercial building with a mortgage and a PACE balance

These are hypothetical round numbers. An owner sells a building for $1,200,000 with $70,000 of selling costs. It carries a $400,000 mortgage and a $150,000 commercial PACE balance, and the buyer's lender requires both to be paid.

Both liens are paid at closing, and $580,000 reaches the intermediary. To defer all of the gain the owner buys a replacement costing at least $1,130,000, reinvests the $580,000 and takes on $550,000 of new debt or adds cash for any shortfall.

If the owner had replaced only the $400,000 mortgage, the $150,000 difference would be net debt relief, recognized to the extent of gain. Run your own numbers with your CPA.

• Liens paid: $400,000 mortgage + $150,000 PACE = $550,000.
• To the intermediary: $1,200,000 − $70,000 − $550,000 = $580,000.
• Replacement for full deferral: $1,130,000 or more, with $550,000 of debt or added cash.

Buying a replacement with solar contracts or a PACE lien: read the title and the contracts first

On the replacement side, a title search should show any recorded PACE agreement or notice of lien, and the seller's disclosures should list solar leases or power purchase agreements you would have to assume. Both change your cash flow and your lender's view of the property.

If you would rather not inherit energy contracts or assessments, a Delaware statutory trust interest leaves those decisions to the trust's sponsor; DST lender documents and carve-outs explains what the trust's loan covers, and whether a DST loan counts as replacement debt covers the debt side of the exchange.