Where the Restriction Actually Comes From
When a buyer purchases a credit under Section 6418, they step into the seller's shoes for tax purposes, treated as if they had earned the credit through the underlying trade or business themselves. That inheritance carries the passive activity limitation under Section 469 along with it. A transferee is deemed to have earned the credit through a trade or business, but is not deemed to have materially participated in that business the way the original project owner did. The practical result: a transferred credit is treated as a passive activity credit, usable only against passive income tax liability.
Why That Definition Excludes Almost Everyone Who Might Want to Buy
Most individual taxpayers simply don't have passive income tax liability in any meaningful amount. Passive income under these rules generally doesn't include salary, most investment income, or gains from an active trade or business, which is exactly the kind of income an individual buyer would actually be trying to offset. Treasury considered and explicitly declined requests to carve out individual taxpayers from this limitation when finalizing the Section 6418 regulations, which means this isn't an oversight or a temporary gap in guidance. It's a deliberate design choice that keeps the buyer pool concentrated among entities that can actually use the credit.
Who's Actually Left as the Buyer Pool
In practice, this limitation is a major part of why the market looks the way it does: C-corporations, insurance companies, financial institutions, REITs, and other entities with genuine passive income or corporate tax liability dominate the buyer side. This is the same buyer profile driving the deal volume we discussed in From 16% to Mainstream: What Fortune 1000 Buyer Adoption Signals for 2027 Pricing, and it's not a coincidence. The passive activity rule effectively pre-selects for institutional and corporate buyers before pricing, compliance, or anything else in the transaction even enters the conversation.
The Narrow Exception Worth Knowing About
There's one meaningful carveout. A transferee who directly owns an interest in the transferor's underlying trade or business at the time the relevant work was performed, and who is unrelated to the transferor for Section 6418 purposes, isn't automatically deemed to fail the material participation requirement. This is a narrow fact pattern, generally relevant to co-investors or partners with a genuine operational stake in the project generating the credit, not a general escape hatch for outside buyers looking to bypass the passive activity limitation.
Why This Should Shape Who Actually Shops for Credits
For advisors and brokers, this rule is worth surfacing early, before a prospective buyer spends time on diligence for a transaction their own tax profile can't actually use. The mechanics we described in Section 6417 and 6418: How Direct Pay and Credit Transfers Actually Work make the transfer itself sound straightforward, and it is, procedurally. What the process doesn't fix is whether the buyer on the other end of that transfer actually has a tax position the credit can offset. That's a threshold question worth answering before a single document changes hands, not after.