Real Estate Tax Benefits under the Inflation Reduction Act

Eco-Friendly Home Credit

Introducing the revamped Internal Revenue Code (IRC) §45L New Energy Efficient Home Credit, designed to incentivize developers of energy-efficient dwelling units. This credit covers single-family homes, multifamily buildings, and mobile homes, promoting sustainable practices in the real estate industry. Previously valued at $2000 per unit, the credit expired in 2021 but has now been extended through December 31, 2022, for units acquired for residential use.

From January 1, 2023, significant changes to the credit rate and qualifications will be in effect, encouraging continued strides towards a greener future in housing development. Embrace these updates and join us in building a more energy-efficient world.

New Energy Efficient Home Credit (§45L):

Single-family dwellings qualifying for Energy Star Residential New Construction Program or Energy Star Manufactured New Homes program receive either a $2500 or $5000 per unit credit.

• For units acquired before January 1, 2025, the $2500 credit applies to homes meeting Energy Star Single Family New Homes National Program Requirements 3.1.
• For units acquired after December 31, 2024, the $2500 credit applies to homes meeting Energy Star Single Family New Homes National Program Requirements 3.2.
• The dwelling unit must also meet the most recent Energy Star Single Family New Homes Program Requirements for its location, effective on January 1st, 2023, or January 1st of two calendar years before the acquisition date.
• The $2500 credit also extends to qualifying mobile homes based on Energy Star Manufactured Home National Program Requirements.
• The $5000 credit is available for units meeting the Zero Energy Ready Home Program of the Department of Energy, in effect on January 1st, 2023.

Multifamily Dwelling Units Credit (§45L):

• Multifamily units meeting Energy Star Multifamily New Construction Program Requirements receive either a $500 or $1000 credit.
• The $500 credit applies to units meeting the most recent Energy Star Multifamily New Construction National Program Requirements, effective on January 1st, 2023, or January 1st three years before the acquisition.
• The $1000 credit is for units meeting the most recent Energy Star Multifamily New Construction Regional Program Requirements for their location, in effect on January 1st, 2023, or January 1st three years prior to the acquisition.
• The multifamily credits increase to $2500 and $5000, respectively, if prevailing wage requirements are met.
• Failure to meet prevailing wage requirements results in affected workers receiving the wage difference plus interest, and developers paying a $5,000 per worker penalty to meet the requirements.

Energy Efficient Commercial Buildings Deduction (§179D):

• The §179D deduction is a permanent part of the IRC, providing up to $1.88 per square foot deduction for energy-efficient commercial property installation in government buildings.
• The Inflation Reduction Act makes permanent changes starting in 2023, eliminating the partial deduction and reducing the energy savings target from 50% to 25%.
• The deduction amount is reduced to $0.50 per square foot and can increase by $0.02 per square foot for every percentage point increase in energy savings, up to $1.00 per square foot (for a 50% reduction).
• The deduction increases to $2.50 per square foot with 25% energy savings if prevailing wage and apprenticeship requirements are met.
• The energy standard is the more recent of ASHRAE Standard 90.1-2007 or the government-affirmed Standard 90.1, up to four years before the property's placed-in-service date.
• The Act expands the deduction allocation to designers for tax-exempt entities and reduces the lookback period for past deductions to three years for property owners and four years for designers.
• The Act introduces an Alternative Deduction for Energy Efficient Building Retrofit Property installed as part of a qualified retrofit plan, based on a certified reduction in energy use intensity a year after the property's placed-in-service date.
• The deduction is limited to domestic buildings originally placed in service at least five years before the qualified retrofit plan's establishment, with a baseline energy use intensity requirement.