Inflation Reduction Act: What Real Estate Professionals Need to Know

As a CPA specializing in real estate taxation, I'm always on the lookout for new opportunities to help my clients save money and optimize their investments. One piece of legislation that has significantly impacted the real estate industry in recent years is the Inflation Reduction Act (IRA), passed in August 2022. Now that we're over two years into its implementation, I want to share some key insights about how this act affects real estate professionals and investors.

The IRA was a sweeping piece of legislation that touched on many areas, from healthcare to prescription drugs. However, its most significant impact on the real estate industry comes from its focus on clean energy initiatives. The act aims to incentivize investment in clean energy technologies and renewable energy sources. This presents some excellent opportunities for real estate professionals to not only reduce their tax burden but also to modernize their properties and potentially increase their value.

One of the most popular provisions of the IRA that I've seen clients taking advantage of is the expanded tax credit for solar panel installations. This falls under the Section 48 energy investment credit, which the IRA extended through the end of 2024. After that, a new credit (Section 48E) will take its place from 2025 to 2032.

The solar credit starts with a base rate of 6% of the project cost. However, it can be increased up to a substantial 30% credit if certain conditions are met. To qualify for the full 30% credit, projects must either be under one megawatt in size or meet prevailing wage and apprenticeship requirements. Don't let the one-megawatt limit scare you off - this is actually quite large, enough to power 2,000 to 5,000 solar panels. Most projects undertaken by small to mid-sized businesses will fall under this threshold and qualify for the full credit.

It's worth noting that while the credit can significantly offset the upfront costs of solar installation, it does impact depreciation. The basis for depreciation is reduced by the amount of the credit received. However, you can still depreciate the remaining basis, which can provide additional tax benefits over time.

Another significant opportunity created by the IRA is the expansion of the Section 179D deduction for energy-efficient commercial building property. This deduction has been around since 2006, but the IRA has made it more accessible and potentially more lucrative.

Previously, to qualify for the 179D deduction, a building needed to achieve a 50% reduction in energy usage compared to a reference building. The IRA lowered this threshold to 25%, making it easier for more properties to qualify. The deduction starts at $0.54 per square foot for a 25% energy reduction and increases by $0.02 for each percentage point above 25%, up to a maximum of 50% energy savings.

Like the solar credit, the 179D deduction also has potential bonuses for meeting prevailing wage and apprenticeship requirements. If these conditions are met, the maximum deduction can increase from $1.07 per square foot to $5.36 per square foot. This is a substantial increase that can result in significant tax savings for larger commercial properties.

It's important to note that unlike the solar credit, the 179D benefit is a deduction, not a credit. This means it reduces your taxable income rather than directly lowering your tax bill. However, for many real estate professionals, especially those in higher tax brackets, this can still translate to substantial savings.

The IRA also introduced some entirely new credits that real estate professionals should be aware of. One that I find particularly interesting is the credit for installing electric vehicle (EV) charging stations. This credit operates similarly to the solar credit, with a base rate of 6% that can increase to 30% if certain conditions are met.

This EV charging station credit is especially relevant for commercial properties located in areas designated as "non-urban" based on the most recent census. The IRS website provides information on which locations qualify. I've seen increasing interest in this credit from various sectors, including assisted living facilities, retirement communities, and educational institutions. Many of these properties are finding that offering EV charging is becoming an attractive amenity for their residents or users.

One of the most innovative aspects of the IRA is how it has expanded the availability of these credits. For instance, the act created mechanisms for tax-exempt entities, such as nonprofit organizations and certain educational institutions, to benefit from these credits through what's called an "elective payment." This is similar to a refundable tax credit, allowing these entities to receive cash benefits even if they don't have a tax liability.

Another important feature introduced by the IRA is the transferability of credits. This allows entities that generate credits but can't use them (perhaps due to lack of tax liability) to sell them to other taxpayers who can use them. The market for these transfers is still developing, but early indications suggest that credits are selling for around 92-95 cents on the dollar. This creates opportunities for both buyers and sellers of credits.

As we look to the future, it's natural to wonder about the longevity of these provisions, especially with the upcoming presidential election. While there has been some talk of repealing parts of the IRA, particularly around electric vehicles, there seems to be growing bipartisan support for many of the act's provisions. Many of the areas benefiting from these credits are represented by both Republican and Democratic lawmakers, which has led to increased backing from both sides of the aisle.

Most of the provisions we've discussed are set to run until 2032, giving real estate professionals ample time to plan and take advantage of these opportunities. However, as with all tax legislation, it's always possible for changes to occur, especially around election times. It's crucial to stay informed and work with a knowledgeable tax professional who can help you navigate these complex waters.

In conclusion, the Inflation Reduction Act has created numerous opportunities for real estate professionals to save on taxes while investing in energy-efficient technologies. From solar panels to energy-efficient building improvements to EV charging stations, there are many ways to leverage these new provisions to benefit your real estate business.

As you consider your next property improvements or investments, I encourage you to think about how these credits and deductions might apply to your situation. The potential for tax savings is significant, and the long-term benefits of energy-efficient improvements can extend far beyond just tax considerations.

Remember, tax law is complex and ever-changing. While this overview provides a good starting point, it's always best to consult with a qualified tax professional who can provide advice tailored to your specific situation. They can help you navigate the intricacies of these credits and deductions, ensuring you maximize your benefits while staying compliant with all relevant regulations.

The Inflation Reduction Act represents a significant shift in how our tax code incentivizes clean energy investments. By understanding and leveraging these new provisions, real estate professionals can not only reduce their tax burden but also contribute to a more sustainable future. It's a rare win-win situation that smart investors and property owners should be eager to explore.