Heat Pump Tax Credit for Landlords and Rentals: Know If You Qualify

The landlord’s 2025 question “Can I get the heat pump credit or not?”

Last week a customer, let's call her Sara, asked if her new heat pump for a duplex would qualify for a federal credit. Short answer: for rental units, no. The popular homeowner credit (Section 25C) doesn’t apply to properties used as rentals. That feels like a door shutting, but there’s another one wide open: depreciation. Instead of a one-time credit, landlords spread deductions over time, reliable, predictable, and often more valuable than folks expect. In this guide, we’ll walk the same path we walked with Sara: confirm eligibility, calculate depreciation the right way, and spot opportunities for mixed-use and commercial buildings. We’ll also cover state/utility rebates, how to time projects, and which heat pump types landlords like because they’re easy to service and tenant-friendly. When you’re ready to size options, our Sizing Guide makes the next steps simple.

Why 25C won’t work for rentals (and what that really means)

The Energy Efficient Home Improvement Credit (25C) the one you’ve seen advertised as “up to $2,000 for heat pumps” , requires the taxpayer to own and use the home as a residence. That’s baked into how the law is written. So if your property is an investment or rental, 25C is off the table. Even in a small multifamily where you live in one unit, you can only claim the portion tied to the unit you personally occupy; the rest is treated like rental property and depreciated instead. That’s the key pivot: stop chasing a homeowner credit that won’t apply and start structuring your install, invoices, and records to maximize depreciation and any commercial incentives you might qualify for.

• Eligible for 25C: Primary residences (and sometimes a second home you personally use).

• Not eligible: Rental units and the rental portion of mixed-use.

Depreciation: the main tax benefit for landlords

Here’s the good news: heat pumps installed in residential rentals are depreciated over 27.5 years under MACRS (the rental building schedule). Think of it as a slow, steady tax savings stream. The method is straight-line, and the mid-month convention applies meaning your first and last year take partial months into account. Because the unit becomes part of the building’s HVAC system, it’s treated as building property rather than short-life equipment.

What matters most is your depreciable basis the total you can spread across those 27.5 years. Don’t just list the outdoor and indoor units; include installation labor, permits, electrical work, line-set replacements, pads, and controls. If the heat pump is part of a broader renovation, be sure your documentation clearly separates costs so your depreciation schedules are clean and defensible.

Real numbers: a quick $8,500 example you can copy

Let’s say you install a central air-source heat pump for $8,500 on July 15. Under the 27.5-year schedule, annual depreciation is:

• $8,500 ÷ 27.5 = $309.09 per year (straight-line).

Because of the mid-month convention, the first year is partial. Installed mid-July, you’ll get roughly $141.66 in year one, then $309.09 each full year after, and a partial in the final year. It’s not flashy like a $2,000 credit, but it’s dependable—and it applies to every rental property improvement year after year.

To squeeze every legal dollar:

1. Capture the full basis. Add equipment, labor, permits, electrical, pads, and line sets.

2. Track by property. Separate schedules keep things clear.

3. Record the in-service date. The month you place the system in service drives first-year math.

What counts in your basis (don’t leave money on the table)

Your depreciable basis should reflect the all-in cost to acquire and install the system. In real-world jobs we see landlords forget these:

• Electrical upgrades: dedicated circuits, breakers, disconnects.

• Mounting pads/stands, condensate pumps, vibration pads.

• Controls/thermostats, low-voltage wiring, communication cables.

• Permits, crane fees, haul-away/disposal.

• Ancillaries: air handlers, line sets, and coil changes when part of the same project.

When parts are added in a later year (say you replace a line set next spring), those costs start a new depreciation schedule based on that year’s in-service date. Keep your documents tidy and label every expense to its property and unit.

Section 179 & bonus depreciation: why rentals rarely qualify

Two fast truths:

1. Section 179 (the one that lets you expense assets immediately) generally does not apply to residential rental property reported on Schedule E. It’s aimed at active trades or businesses and nonresidential property.

2. Bonus depreciation doesn’t apply to assets with a 27.5-year life, which covers the heat pump once it becomes part of the building.

There are narrow exceptions. If you run rentals as an active business entity with qualifying nonresidential space, some items may fit 179 rules. Also, personal property (think appliances) and land improvements (like fencing or paving) may have shorter lives that can accept bonuses. For most standard residential rentals, though, plan on 27.5-year straight-line for the HVAC system.

Mixed-use, house-hacks, and small multifamily: how to split it cleanly

If you live in one unit of a duplex or four-plex and rent the rest, your project usually splits into two buckets:

• Owner-occupied portion: potentially eligible for homeowner incentives (like 25C) for your unit only.

• Rental portion: depreciated as part of the building over 27.5 years.

The trick is allocation. Use a reasonable method—square footage, number of identical units, or actual installed scope by area. Put that method in writing (a simple memo works). Your tax preparer will mirror that in the return.

If you’re replacing equipment in multiple rental units, phase installs so you can manage tenant access, keep cash flow steady, and clearly separate invoices by unit. For apartments that benefit from individual control, consider ductless mini-splits.

Commercial & mixed-use: the 179D deduction you shouldn’t overlook

Own a building with nonresidential commercial space? You may qualify for the Section 179D deduction when you significantly improve energy efficiency in systems like HVAC. The value is calculated per square foot (potentially several dollars per sq ft) and requires meeting specific energy savings vs. ASHRAE 90.1. This isn’t a back-of-the-napkin job—you’ll want an engineer’s certification

When does it make sense?

• Office or retail on the first floor with apartments above.
• Warehouse or light industrial with admin spaces.
• Hotels/motels with central or unitized HVAC.

If you’re in this bucket, talk early with your CPA and an engineer so the design and documentation meet the standard.

For hotels, PTAC heat pumps simplify room-by-room maintenance and keep downtime low.

Investment Tax Credit (ITC): when heat pumps can qualify

While the homeowner 25C isn’t available to rentals, some business-use or commercial projects may intersect with the Investment Tax Credit (ITC)—especially where systems integrate with other qualifying clean-energy equipment or are part of larger energy projects. The rules are specific: property must be used in a trade or business or for income-producing activity, and technology type matters. If you’re planning a complex upgrade—say, a central heat pump plant plus controls, or a mixed-use building project—bring your CPA into the design conversation.

How owners approach it:

• Start with a tax sketch (what applies to your building type?).

• Align equipment selection to the incentive path.

• Lock in documentation during design, not after install.

Need help choosing equipment families that fit your plan? Compare commercial package heat pumps vs. residential packaged heat pumps to match load, service access, and future expansion.

Stacking state/utility rebates with depreciation (this is where cash returns show up)

Even though the federal homeowner credit doesn’t apply, state energy offices and local utilities often pay rebates for rental properties. These are typically point-of-sale or post-install checks. Two notes:

• Rebates usually reduce your depreciable basis (since you didn’t ultimately pay that amount).

• That’s okay you still keep the cash rebate now and the depreciation later on the net cost.

How we help landlords do it smoothly:

• Ask your installer to complete rebate forms right after commissioning.

• Keep a copy of the rebate check or approval email in your asset file.

• Update your fixed asset entry to reflect the net basis.

If you’re equipping many units, utilities may offer bulk or custom incentives worth a call before you finalize model counts. Our Help Center has contacts and installed prep checklists.

Picking landlord-friendly heat pump equipment (serviceable, quiet, reliable)

For rentals, you want durability and easy service access. Three patterns we see work well:

• Ductless mini-splits: Individual room control, great for retrofits, minimal drywall work. See ductless systems.
  
  

• Through-the-wall & PTAC heat pumps: Perfect for hospitality and student housing; quick swap-outs keep units rentable. Browse PTAC.

• Packaged units: Fast rooftop/service access and fewer indoor disruptions. Compare package units.

Prefer lower-GWP refrigerant systems? Check our R-32 heat pump systems. If you’d like help matching loads to real floor plans, send photos for a Quote by Photo we’ll recommend models and accessories that installers appreciate.

Timing your project: in-service dates, deadlines, and smooth installs

Timing matters. Your depreciation clock starts when the system is placed in service not when ordered so coordinate install dates with tenant schedules and your tax year. For mixed-use or commercial projects, be mindful of incentive deadlines tied to construction start or certification dates. Practical field tips:

• Schedule electrical early. Panel work can delay commissioning.

• Swap like-for-like first to minimize downtime; add enhancements (smart controls, ERVs) once heating/cooling is live.

• Document the handoff: commissioning report, serial numbers, thermostat settings.

If you’re building your 2025 plan now, we can help you pick models, map rebates, and prepare tax-friendly invoices. Start at our Design Center.