Maximizing Green Building Tax Incentives for Multifamily Developers and Homebuilders

Green building tax incentives: As the world prioritizes sustainability, green building practices have become increasingly important for developers and builders. 

With the environmental benefits, there are also many financial incentives for those who incorporate green building practices into their projects. 

The Inflation Reduction Act (IRA) offers several federal tax incentives for green building, including the 45L Tax Credit, 179D Tax Deduction, and 25C Tax Credit.  

Let’s explore these tax incentives and discuss how multifamily developers and homebuilders can maximize their benefits.

The 45L Tax Credit – Green Building Tax Incentive

The 45L Energy-Efficient Home Tax Credit offers contractors and builders a way to offset the expenses of constructing energy-efficient single-family or multifamily properties. 

45L provides a dollar-for-dollar reduction in their taxes owed or paid during the tax year when the property is sold or leased.

The Internal Revenue Code (IRC) Section 45L offers a credit per dwelling unit for every newly constructed energy-efficient home. 

This credit applies to homes built by eligible contractors and acquired by individuals for residential use within the tax year. It can be transferred to the homeowner and utilized on an amended tax return or carried forward for a maximum of 20 years.

To learn more about the 45L Tax Credit and its requirements, refer to our comprehensive guide: Everything You Need to Know About the 45L Tax Credit.

Or visit our 45L Tax Credit for Builders and Contractors page.

45L Tax Credit details on Single Family Homes Green Insight LLC

Single-family homes are eligible for a $2,500 credit for obtaining ENERGY STAR for Homes certification and a $5,000 credit for a DOE Zero Energy Ready Home certification. Manufactured homes are eligible for the $2,500 credit as well for receiving the ENERGY STAR Manufactured Homes certification.

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Multifamily homes are eligible for a $500 credit for ENERGY STAR Multifamily New Construction certification, a $1,000 credit for DOE Zero Energy Ready Home certification, a $2,500 credit for ENERGY STAR Multifamily New Construction certification with prevailing wage requirements, and a $5,000 credit for DOE Zero Energy Ready Home certification with prevailing wage requirements. Our Inflation Reduction Act FAQ page provides more details

The 179D Tax Deduction – Green Building Tax Incentive

Section 179D is a tax credit provided by the federal government. It allows commercial building owners and primary designers of public building projects to be eligible for a deduction if they include specific sustainable building components in their projects.

The EPAct 179D tax deduction, also known as the Energy Policy Act, offers a sliding scale deduction ranging from $2.50 to $5.00 per square foot. 

This deduction applies to the implementation of energy systems that can reduce energy and power costs by 25% to 50% compared to buildings that meet the minimum requirements set by ASHRAE Standard 90.1-2019. 

To qualify for this deduction, retrofits must demonstrate an improvement of 25% to 50% in terms of existing building performance (EUI).

To understand the eligibility criteria and how to take advantage of the 179D Tax Deduction for multifamily buildings, we recommend reading our comprehensive guide: Your Essential Guide to the 179D Tax Deduction.

The 25C Tax Credit – Green Building Tax Incentive

For homeowners who want to improve the energy efficiency of their homes, the 25C Tax Credit is a highly beneficial incentive. 25C provides individuals with substantial financial savings by reducing their tax bill if they invest in energy-efficient upgrades.

Updated under the Inflation Reduction Act, 25C is a non-refundable credit that aims to promote energy efficiency. It helps homeowners lessen their tax burden by installing qualifying upgrades like insulation, door and window sealing, electrical improvements, and more.

Previously, the credit was limited to $500. However, starting in 2023 and continuing until 2032, the credit has been increased to 30% of the total installation costs. So homeowners can now receive up to 30% of their expenses back, potentially amounting to annual tax credits of up to $3200, depending on the extent of their upgrades.

To learn more about the 25C Tax Credit refer to our detailed guide: What’s the 25C Tax Credit? (And How Can You Get It?).

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Are you currently involved in the construction or renovation of a building? 

If you are, you will be directly affected by green building tax incentives. 

Your project has the potential to qualify for significant tax credits amounting to thousands of dollars. For instance, if your single-family or manufactured home meets ENERGY STAR requirements, you could be eligible for a tax credit of $2,500. If your home is certified as a DOE Zero Energy Ready Home (ZERH), you may qualify for an even higher tax credit of $5,000.

Maximizing Green Building Tax Incentives

To maximize the benefits of the 45L Tax Credit, 179D Tax Deduction, and 25C Tax Credit, multifamily developers and homebuilders should consider the following strategies:

  • Understand the Requirements: Familiarize yourself with the eligibility criteria and requirements of incentives to ensure your projects meet the qualifications.
  • Collaborate with Energy Consultants: Partner with experienced energy consultants specializing in green building and tax incentives. They can guide you on how to meet the requirements and optimize energy efficiency in your projects.
  • Integrate Energy Efficiency from the Start: Incorporate energy-efficient design and construction practices from the initial stages of your projects. This will ensure that your buildings meet the necessary standards to qualify for the tax incentives.
  • Maintain Detailed Documentation: Keep thorough records of energy-efficient features, certifications, and any supporting documentation required for claiming the tax incentives. This documentation will be crucial when applying for the incentives.
  • Stay informed about updates to the green building tax incentives to adapt your strategies and take full advantage of the available benefits.

These incentives contribute to a more sustainable future and provide financial advantages that make green building more accessible and attractive.

The Inflation Reduction Act (IRA) offers valuable tax incentives for multifamily developers and homebuilders who prioritize energy efficiency and sustainable building practices. 

By understanding the requirements and strategically utilizing tax credits like 45L, builders can create environmentally friendly buildings while maximizing their financial benefits.

Green Insight can help you save big

Consulting with experienced professionals and staying up-to-date with the latest regulations will help you navigate the complexities of green building tax incentives and ensure you receive the maximum benefits available.

For more information on green building tax incentives and how to optimize your projects, contact us today. We are committed to helping you achieve your sustainability goals while maximizing the financial advantages of these incentives.

Your Essential Guide to the 179D Tax Deduction

If you’re a commercial builder or you own a commercial property (or a residential building 4 stories or taller), it’s important that you stay up to date on the latest requirements for the 179D tax deduction (part of saving with the Inflation Reduction Act). This tax deduction, geared toward making commercial buildings more energy efficient, may be something you can begin taking advantage of today.

In this article, we will show you exactly what this tax deduction is and what requirements need to be met to qualify.

What is the 179D Tax Deduction?

Named after section 179D of the Internal Revenue Code, the 179D tax deduction was designed as an incentive for designers and builders to develop and build commercial buildings that are energy efficient. This incentive can be applied to both new commercial constructions or to existing buildings that have been significantly rehabilitated to be more energy efficient.

This program’s primary objective is to drive commercial building owners to make renovations that will reduce energy use or to incentivize designers to design buildings that will be more energy efficient.

After the passage of the Energy Policy Act of 2005, this tax deduction also extends to building owners who invest in qualified energy-efficient building improvements. If the commercial building is owned by the government, the deduction can extend to those primarily responsible for designing the improvements.

This tax deduction was made permanent with the Consolidated Appropriations Act of 2021. This act also updated standards that need to be met to qualify as well as provide an inflation adjustment for any property that was in service after December 31, 2020.

New Updates to the 179D Deduction for 2023

New updates for the 179D deduction went into effect in January of 2023. These updates included an increase in the tax deduction, new eligibility for real estate investment trusts (REITs), and more. Qualified entities include:

  • Federal government
  • State or local government
  • Indian tribal government
  • Other tax-exempt organizations including not-for-profit hospitals

These updates included an increase in the tax deduction, new eligibility for real estate investment trusts (REITs), and more.”

What Building Types are Eligible for the Tax Deduction?

Any type of commercial building is eligible, even if owned by a non-profit entity. This includes residential buildings four stories and taller. It’s important to know that the residential 45L tax credit can be claimed in combination with the 179D as there is no longer a height restriction for residential buildings to claim the 45L. Learn more about the 45L tax credit.

Who is Eligible to Receive the Tax Deduction Credit?

Not everyone involved in a building project is eligible to receive this tax deduction. Primarily, those who are eligible for the deduction are taxpayers who are responsible for the ground-up construction of commercial buildings or building owners who invest in energy-efficient improvements. These can include:

Architects and Engineers

As primary designers of a building’s technical specifications, architects and engineers typically qualify for this tax deduction through the design of a property’s building envelope, heating, ventilation, air conditioning (HVAC) system, and indoor and outdoor lighting systems.

Construction Contractors

Contractors can qualify if they have input in the design or must take part in the design of the building based on their contract.

Taxpaying Designers of Tax-Exempt Entities

A lot of the largest commercial buildings are owned by tax-exempt entities such as state and federal governments, tribal governments, the military, K-12 schools, not-for-profit hospitals, and universities. While these entities do not qualify for the tax deduction since they are tax-exempt, the incentive can be allocated to the taxpaying designer who built or renovated the building for energy efficiency.

Building Owners and Select Tenants

Owners of existing commercial buildings qualify for this tax deduction if they are responsible for the installation of qualifying systems that make a building more energy efficient. In addition, tenants of commercial buildings may also qualify if they make construction expenditures that are geared toward energy efficiency.

The residential 45L credit can be claimed in combination with the 179D as there is no longer a height restriction for residential buildings to claim the 45L.

What are the Requirements?

In order to qualify for the 179D tax deduction, certain criteria must be met.

Qualifying owners can get a tax deduction of up to $1.88 per square foot on properties that were completed before January 1, 2023. New or existing renovated buildings completed after January 1, 2023, are eligible for deductions of up to $5.00 per square foot with the installation of the following components of energy efficiency:

  1. Interior lighting
  2. Building envelope
  3. Energy-reduced HVAC or hot water systems

More incentives are available to more organizations with the update of a sliding scale deduction. For the installation of energy-reducing components, a sliding scale is used. With reduction costs of 25% to 50%, tax deductions of $2.50 per square foot to $5.00 per square foot can be utilized. These energy savings are in comparison to buildings that meet the minimum requirements set by the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) 90.1 Standard. These cost savings must be calculated by software that has been approved by the Internal Revenue Service.

Who Will Benefit from the 179D Tax Deduction?

The obvious benefit of the 179D Tax Deduction initially goes to building owners. In being given an opportunity to defray the cost of energy-efficient design and building materials, owners are more likely to either build new buildings that are greener or transform existing structures into more energy-efficient properties. In time, this will also benefit owners through reduced utility costs.

In the case of tax-exempt entities such as federal, state and local, or tribal governments, architects, engineers, and contractors who work on new construction or renovation projects are eligible to claim the 179D deduction.

Want more information? We’ve developed an Inflation Reduction Act (IRA) Frequently Asked Questions page just for this!

Learn about the 25C Tax Credit, also part of the Inflation Reduction Act.

Are you a commercial building owner or a developer who specializes in commercial and/or mid/high-rise residential properties?

It’s time to know the ins and outs of how to make the 179D tax deduction benefit you. Download our FREE eBook: “How to Get the Most From the Inflation Reduction Act to see how you can take advantage of this tax deduction and put money back in your pocket while making environmentally conscious building decisions.

Need further help? While our Inflation Reduction Act work applies to residential projects seeking 45L (including multi-family of any height). For commercial buildings or residential buildings 4 stories and above, we can refer you to a trusted partner who can help you with that.

The green building experts at Green Insight would love to partner with you on future building or renovation projects that you’d like to make more energy efficient. Contact us today to get started!