Prepaid solar lease explained: the third party takes 48E, you finance 70%

A prepaid lease is an arrangement where you pay the cost of a solar lease upfront, at a discount, and a third party owns the system for the first years in order to capture the federal 48E credit. You pay about 70% of the cash price. In year 6 you can buy the system at “fair market value”. It is the structure the industry found so that a buyer can still benefit indirectly from the 30% federal credit after the residential credit ended.

How does a prepaid lease work?

EnergySage describes it as a hybrid arrangement: you pay the full lease or PPA upfront at a discounted rate, and take ownership of the system after an initial term, typically six years. During that period the third party owns, monitors and maintains the equipment, and you receive the electricity.

The “prepaid” can be financed with an ordinary solar loan. In other words: a loan for 70% of the price instead of 100%. That is the practical advantage over a direct solar loan in 2026.

Why must the third party own it for 5 years?

Because the 48E credit is recaptured if the owner sells the asset within five years. EnergySage explains that tax law requires companies to hold the system at least five years to avoid the IRS clawing back the credit, which is why most prepaid contracts offer the transfer around year six.

The context: the residential 25D credit ended for systems installed after December 31, 2025, per the IRS. 48E, for third-party-owned systems, continues through the end of 2027 per Solar Power World’s analysis. The prepaid lease is the bridge between the two. Detail in federal solar tax credit 2026; confirm with your tax preparer.

Heads up: the discount is not a gift. The provider receives 30% from the IRS and returns part of it to you. How much depends on them. If the prepaid price is not clearly lower than the cash price of the same system from another installer, the 48E got lost along the way.

What is “fair market value” and why is it the weak point?

It is the price at which you can buy the system in year 6. EnergySage defines it as, in theory, the depreciated cost of the system minus the cost of removing it, and flags the problem: since you already prepaid the system’s value, that number “should” be close to zero, but most contracts do not guarantee it. They use language like “fair market value determined in good faith by the provider”.

In other words, in year 6 the provider decides how much the system you already paid for is worth. Most do it fairly. But you are trusting their integrity, not a clause. If the contract has no buyout price schedule by year, or a concrete formula, the risk is yours.

EnergySage also mentions equipment restrictions (FEOC rules on component origin) that limit which panels and inverters the provider can use to qualify for 48E. Ask what equipment goes on your roof and why.

Who does it make sense for?

• Someone who wants to own at the end, has good credit (providers do check) and wants to indirectly recover part of the 30% they can no longer claim.
• Someone with the cash or a no-dealer-fee loan who would rather pay 70% than 100%.
• Someone who accepts that they do not own it in the first years, and that in year 6 they will negotiate a price.

Compared with a 25-year lease, the prepaid ends in ownership and has no escalator. Compared with a direct purchase, it costs less today but requires trusting the transfer. Compared with the 3-or-5-year subscription, it requires credit and cash, but ends with the system in your hands.

When a prepaid lease does NOT make sense

• When the contract does not guarantee the year-6 buyout price and you are not willing to rely on “good faith”.
• When the prepaid price equals or exceeds another installer’s cash price. No 48E was passed through.
• When you will sell the house before year 6: the lease contract remains active and must be transferred.
• When you do not want maintenance afterward: at transfer, the inverter and monitoring become your responsibility, as with any purchased system.
• When your credit does not qualify. They do check here; for that profile, read solar with bad credit.

What to check before you decide

• The prepaid price against the cash price of the same system from at least one other installer.
• The exact buyout clause: schedule by year, formula, or “good faith”. If it is “good faith”, ask what happened with previous customers.
• What happens if you want to sell before year 6.
• What equipment they install and whether manufacturer warranties transfer to your name.
• All six options side by side in ways to get solar compared.