Real Estate Owners, Builders, Contractors Can Find Valuable Tax Savings in New Law by Kevin McNally, JD
Posted on February 14, 2023
by
Kevin McNally
The passage of the Inflation Reduction Act in 2022 ushered in new and expanded tax-saving opportunities for individuals and businesses that produce, adopt and/or invest in energy-efficient technologies, including wind, solar and geothermal power. This includes an extension of tax savings to commercial real estate property owners and, for the first time, real estate investment trusts (REITs) and tax-exempt organizations.
Energy-Efficient Commercial Building Property Deduction
In 2020, Congress made permanent Section 179D of the U.S. tax code that enables commercial real estate owners to claim immediate tax deductions for the costs they incur to construct new buildings or improve existing properties with systems designed to reduce energy use. This can include the costs of energy-efficient heating, ventilation and air conditioning (HVAC) systems, lighting and/or improvements to walls, floors, doors and roofs.
Effective for tax years beginning on Jan. 1, 2023, the law expanded to bring additional tax benefits for property owners, including the following:
- The potential deduction increases from $1.80 per square foot to as much as $5.00 per square foot. While the deduction is not subject to a lifetime limitation, it works on a rolling basis that requires taxpayers to reduce the applicable rate per square foot by the amount they claimed as deductions in the most recent three years.
- Taxpayers can now claim the deduction on commercial buildings every three years rather than once over the taxpayer’s lifetime.
- The standard by which taxpayers must demonstrate energy efficiency decreases from a 50 percent reduction in energy costs to a 25 percent reduction.
- The availability of the deduction now applies to not-for-profit organizations, tribal governments, REITs, and certain retrofit projects.
Despite these positive developments, taxpayers must be aware that deductions claimed for energy efficiency are subject to recapture provisions on a subsequent sale, just like bonus-depreciation deductions.
Energy-Efficient Home Improvement Credit
Unlike the 179D tax deduction, which lowers commercial property owner’s taxable income, qualifying developers, builders and sellers of energy-efficient residential properties may have an opportunity to claim a nonrefundable tax credit that lowers their tax liabilities. This Section 45L energy-efficient home credit, which also applied to certain residential property contractors, was also expanded under the Inflation Reduction Act to include the following provisions:
- The potential amount of the credit under the Energy Star standards increases from $2,000 per single-family home to $2,500 in 2023.
- The maximum tax credit under the Zero-Energy Ready home standard increases to $5,000 per unit for single-family and multifamily developments.
Understanding the nuances in the tax code and how to apply them to your unique circumstances can be a complicated process. To maximize all the tax-saving opportunities available to you, it is crucial you work with experienced advisors and accountants.
About the Author: Kevin McNally, JD, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with high-net-worth families, private equity firms and real estate development businesses on a broad range of tax matters, including complex deal structuring. He can be reached at the CPA firm’s Miami office at 305-379-7000 or at info@bpbcpa.com.
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