Real estate developers received welcome news before the end of 2019 when Congress and the White House reached agreement on two expired tax breaks: The Section 179D Energy-Efficient Tax Deduction for Commercial Buildings and the Section 45L Energy-Efficient Tax Credit for Multifamily and Residential Developers. Both were retroactively extended through 2020 to include 2017 and 2018.
Section 179D tax deductions are available for up to $1.80 per square foot for energy-efficient commercial building property. Created by The Energy Policy Act of 2005 and known officially as the 179 Energy Policy Act Deduction, or EPACT, the calculation for the deduction is calculated based on the installation of energy-efficient assets, such as the building envelope, HVAC units and lighting in newly constructed or renovated commercial buildings.
The deduction can also be applied to apartment buildings that are four stories or more. However, for government-owned buildings, such as airports, courthouses and libraries, the 179D tax deduction is allocated to the designer rather than the commercial property owner.
The maximum deduction of $1.80 per square foot is equivalent to a 50% reduction in total annual energy and power costs. A partial deduction of $0.60 per square foot or system is available for the reduction of energy consumption through the building envelope, HVAC and lighting, and there is a partial deduction for interim lighting ranging from $0.30 to $0.60 per square foot. Any accrued tax deductions from these buildings can be carried back two tax years or can be carried forward for up to 20 years.
Building owners (and lessees) are required to provide the following:
- Full set of architectural plans including all specifications
- Energy compliance documentation for the building envelope, HVAC and lighting
- EnergyPro file, which is used to generate T-24 documentation
Section 45L tax credits of up to $2,000 are available for contractors for the construction of new energy-efficient residential units or dwellings that leased or sold before the end of 2020.
Qualifying properties include apartments, condominiums, townhouses and single-family homes. Properties must be three stories or lower and incorporate features that include high R-value insulation and roofing, doors, windows and/or HVAC systems. An unrelated third-party licensed professional is required to complete the certification.
For single and multifamily dwelling units, the unit must consume at least 50% less energy to offer the same heating and cooling functions as an identical residence that is not energy efficient. In addition to single-family homes, dwellings include apartment buildings, townhouses, condominiums, student housing and assisted living facilities.
The qualified contractor – typically the developer, builder or homeowner – is the only person who can claim the 45L tax credit, and they must own the unit at the time of construction or improvement.
Other requirements include:
- At least 10% of the energy savings must come from the building envelope.
- The home must be sold, leased or rented to qualify for the 45L credit
- For individuals, a person must own and have a basis in the qualified energy-efficient home during its construction to qualify as an eligible contractor
A “person” can also be a corporation, estate, trust, partnership or association.
Work With a Qualified Real Estate Accountant
Claiming a Section 179D tax deduction or Section 45L tax credit involves complex calculations. For example, there are several methods for obtaining the tax credits and deductions depending on the energy-efficiency levels of each project.
It is also important to understand certain limitations and ensure you are meeting all the requirements and getting full credit for the past two years. It is important that you consult with a qualified tax advisor with expertise in specialty tax planning.
Questions about strategic planning or other real estate and construction issues? Our real estate accountants can help. Contact Eric Olsen at (214) 635-2538.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.