A highly efficient transformerless inverter and a method of controlling the same. The inverter is designed for use in a distributed power generation system, such as a home having photovoltaic cells (e.g., a solar panel), wind turbines, batteries, and other sources of DC electrical power. The inverter includes four switching states including a positive current path for a positive half-cycle, a free-wheel current path for the positive half-cycle, a negative current path for a negative half-cycle, and a second free-wheel current path for the negative half-cycle. The free-wheel current paths include a reduced number of circuit components (e.g., diodes), which enables a highly efficient inversion of DC power to AC power.