It’s been several months since President Joe Biden signed the Inflation Reduction Act on August 16, 2022. The Act included new tax credits and key changes to existing tax laws. As the real estate market faces new challenges, understanding how the Act impacts the real estate market is more important than ever. Range Homes discussed some of the key benefits of the Inflation Reduction Act to take advantage of in 2023 and beyond.
Green Tax Incentives
The Inflation Reduction Act has several green tax incentives real estate investors can take advantage of:
Commercial Solar Panel Credit
The Inflation Reduction Act extends the commercial tax credit for solar panels, with a phase-out beginning in 2032. The tax savings will be up to 30% of whatever the panels cost your business or real estate activity. For example, if a landlord installs solar panels on a building it uses for business, the IRS will pay up to 30% of the cost of the solar panels. In addition, even though panels are designed to last 5 to 30 years, they will depreciate in just over 5 years.
In order to qualify for these benefits, the following provisions apply:
- The panel system must be new
- Must be located in the United States
- Must comply with the new prevailing wage and apprenticeship rules
- Property must be held for a minimum of 5 years
In addition, there are bonus credits for installing panels in an “energy community” and for using domestic content.
Energy Efficient Home Credit
Specifically designed for housing developers, new credit rules applied to dwelling units acquired after December 31, 2022. Eligible contractors receive the following credits:
- $2500 for homes meeting Energy Star Requirements
- $5000 for zero energy ready homes
EV Charger Credit
Section 13404 of the Inflation Reduction Act modifies and extends the Alternative Fuel Refueling Property Credit. This credit is for building owners who want to install EV chargers in their parking lot or garage. It should be noted this credit is only available to EV chargers installed in rural areas or low-income communities.
Qualified business owners will pay for 30% of the cost of the chargers per the following conditions:
- Chargers must be new, not used
- Must be located in the United States
- Must comply with the new wage and apprenticeship rules of the Inflation Reduction Act
Multifamily and Commercial Buildings
Section 13303 of the Inflation Reduction Act revamps Section 179D (deduction) of the tax code. The updated rules provide the opportunity to deduct a large portion of their real estate investment in the first year instead of waiting several years to deduct it as a “depreciation expense.”
To qualify, one of the following criteria must be met:
- Purchase a new energy efficient building; or
- Make a significant energy retrofit to an existing building.
The deductible amount available for taxpayers will be the lesser of either a formula constructed around an engineering standard designed for efficiency, or the cost of the retrofit.
Note: In most instances, the decision to claim the 179D (deduction) must be planned before beginning the project: designs must meet the tax law requirements and the ASHRAE standard.
The Energy Standard for Buildings Except Low-Rise Residential is a standard published by the ASHRAE that provides minimum requirements for energy efficient designs for buildings except for residential buildings that are low rise. This would include buildings less than four stories high, single-family homes, multi-family homes, modular homes, and mobile homes.
Generally speaking, utility rebates are a taxable event, but according to Section 136 of the Internal Revenue Code:
“Gross income shall not include the value of any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy conservation measure.”
In this instance, the energy conservation measure is defined as “any installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand with respect to a dwelling unit.”
This means if a rebate is claimed from a local utility that meets the energy conservation definition, income tax won’t have to be paid on that amount. However, before any credits or tax deductions are calculated, the rebate amount must be subtracted from the purchase price first.
The Inflation Reduction Act is designed to help combat climate change and provide many new green tax incentives for everyone, including those in the real estate industry. For more information on the Inflation Reduction Act and the best ways to take advantage of the incentives it provides, contact your Range Homes real estate agent and consult with a tax professional.
About Range Homes
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Why East Bay CA?
East Bay CA is known for its good economy, beautiful landscapes, and extremely popular housing market. When other states and territories have experienced a decline in housing prices the Bay Area, in general, has remained strong. This doesn’t mean you should not diversify your portfolio across many states, but Range Homes Realtors agree that this is certainly a strong place to start for a novice investor. There are even some great low-cost homes that are ripe for renovation.
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