Written by: Mark Ravera, CPA
In the ever-evolving landscape of real estate tax incentives, staying informed is not just smart – it’s essential. The Inflation Reduction Act is a game-changer allowing real estate owners and developers to enjoy lucrative tax incentives for energy-efficient properties. The release of 50 new provisions in late 2022 turned the industry on its head. Still, amid the whirlwind, two provisions rise to the top for their impact and redefine the playing field, offering significant savings that real estate owners and developers can’t afford to overlook.
- The enhancement of the 179D Deduction for Energy-Efficient Commercial Buildings; and
- The extension and enhancement of the 45L New Energy-Efficient Home Tax Credit (for single or multi-family homes)
For larger projects that qualify, these incentives can translate to millions of dollars in tax savings for developers, operators, and investors. Although not mentioned in this communication, projects that qualify for these two incentives may also be good candidates for a cost segregation study.
179D Deduction for Energy-Efficient Commercial Buildings (Residential and Non-residential)
The maximum deduction for the Energy-Efficient Commercial Buildings Deduction has increased from $1.88 to $5 per square foot of the building. The deduction applies to new construction or improvements/retrofit of an existing structure. The deduction applies to the following energy-efficient building components (both residential and non-residential):
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- Interior lighting systems
- Heating, cooling, ventilation, and hot water systems
- The building envelope
The improvements must reduce associated energy costs by 25% or more to be eligible, compared to a reference building that meets the latest American Society of Heating, Refrigerating and Air-Conditioning Engineers Reference 90.1 Standard.
The deduction is generally up to $1 per square foot of the building if it meets the abovementioned standard.
To be eligible for up to $5 per square foot of the building, the project must satisfy prevailing wage and apprenticeship requirements for the construction period.
45L New Energy-Efficient Home Credit
Based on a project meeting certain eligibility requirements, the tax credit may be $500 to $5,000 per unit. The project must be new construction and meet applicable energy savings requirements to be eligible for the tax credit.
For the $2,500 tax credit per unit, the project must meet specific Energy Star Single Family Homes Program requirements. For the maximum tax credit of $5,000 per unit, the project must be certified as zero-energy ready under the Department of Energy Zero-Energy Home Program.
The credit for multi-family dwelling units is 20% of the applicable tax credit amounts mentioned above, except for those projects that qualify for 100% of the applicable tax credit amount by meeting the prevailing wage requirements for the project.
Please note that these enhanced tax benefits are available for projects placed in service after 2022 for both provisions discussed. Our team is available if you would like to discuss these tax incentives and how they may apply to your projects.