For those in the multifamily residential rental market, purchasing and rehabilitating a distressed property can bring tax value adds for your business or organization.
However, many real estate, construction, and other companies overlook tax-related cash flow opportunities for certain rehabilitation work, like replacing windows and AC units, that can create a $2,000/unit Section 45L tax credit or deductions provided by Section 179D.
The credit and deduction were recently extended and made permanent, respectively. An overview of these incentives, as well as steps for how to pursue them, follows.
What Is the Section 45L Tax Credit and How Does It Apply to Renovations and Rehabilitations?
The Internal Revenue Code (IRC) Section 45L Energy Efficient Home Credit is widely known, and used, as an incentive for new energy efficient, ground-up, construction projects.
Its ability to be applied to “substantial reconstruction and rehabilitation,” as referenced in the Section 45L(b)(3), is often overlooked.
If you’re renovating or rehabbing a multifamily property with three-stories or fewer—or have previously done so—you could be eligible for the $2,000/unit tax credit if the improvements both:
- Results in at least a 50% energy reduction
- Include minimum required components
The credit can often be applied to:
- Apartments, townhomes, and duplexes
- Senior housing facilities
- Student housing
- Residential condominiums
The credit now extends through December 31, 2021, following the signing of the Consolidated Appropriations Act, 2021 on December 28, 2020.
Taxpayers may also be able to qualify by amending returns in prior open tax years.
The credit, layered on top of state and local utility incentives, could provide substantial benefits for your bottom line and energy savings for residents, as well as environmental benefits.
What Is the 179D Tax Deduction?
Your multifamily property may qualify for the 179D Energy Efficient Building tax deduction if it’s four-stories or more and the renovations include any of the following:
- Lighting
- Heating, ventilation, and air conditioning (HVAC)
- Building envelope work
What Are Next Steps to Claim The 45L and 179 Incentives?
For the section 45L credit, each unit must be certified by an approved tester. The tester must determine the unit has:
- An annual level of heating and cooling energy consumption at least 50% below that of a comparable dwelling unit constructed in accordance with the 2006 International Energy Conservation Code (IECC)
- A building envelope component that accounts for at least 1/5 of the 50% reduction in energy consumption
To realize the 179D tax deductions, a contractor or professional engineer licensed in the state where the building is located must model the energy performance of the building and compare it with the standards set by the ASHRAE.
Working with a tax professional versed in the nuances of these incentives is beneficial to avoid draining precious time and resources navigating the complex claims process.
We’re Here to Help
To learn more about these incentives and if your project might qualify, contact your Moss Adams professional.