Real Estate Tax Incentives in the Inflation Reduction Act

The recent enactment of the Inflation Reduction Act may not have had some of the larger tax changes proposed in the Build Back Better Act, but it did contain some good news and tax benefits for the real estate industry. The §45L tax credit for energy-efficient homes and §179D energy-efficient commercial building tax deduction, which had both expired December 31, 2021, were extended and expanded upon. The highlights of each are as follows:

45L Tax Credit for Energy Efficient Homes

  • Extension of $2,000 tax credit per unit for qualifying homes or apartments sold or placed in service through December 31, 2022
  • Increase in tax credit to $2,500 per unit for qualifying units sold or placed in service from January 1, 2023, through December 31, 2032
  • New $5,000 per unit tax credit for certified Zero Energy Ready units
  • Eligibility for multi-family properties in excess of three stories

179D Energy Efficient Commercial Building Deduction

  • Extension of current $1.88/SF deduction for properties placed in service by December 31, 2022
  • Increase in deduction to $2.50/SF for qualifying improvements with additional efficiency escalators providing a potential deduction of $5.00/SF for properties placed in service starting January 1, 2023
  • Expansion of allocation to the designers of qualifying improvement projects (architects, engineers, contractors) beyond governmental entities to include all tax-exempt entities

The increased credit and deduction amounts listed above are available if you meet the new prevailing wage and apprenticeship provisions included in the Inflation Reduction Act. Credit and deduction amounts are reduced to 20% of their applicable amounts if these provisions are not met. While we await further guidance on these provisions, don’t hesitate to reach out to your Perkins tax advisor to start planning to take advantage of these tax benefits.