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.
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.
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?).
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.