The Inflation Reduction Act of 2022 (IRA) has created new energy incentives for the real estate industry aiming to reduce carbon emissions by 40%. Incentives are available for the commercial and residential sectors and effectively lower the costs of energy-saving property improvements while also decreasing utility bills. The IRA expands and extends several incentives and tax credits making them easier to qualify for:

Commercial Building Energy-Efficiency Tax Deduction (IRC Sec. 179D)

Prior to the IRA, owners and developers could deduct $1.80 per square foot for a building that reduced its energy consumption by 50% or more. Under current law, buildings that decrease their energy usage by just 25% could be allowed a deduction of up to $5 per square foot subject to new prevailing wage/apprentice requirements. More buildings, new construction and existing, will now be eligible for the Section 179D deduction than under previous law.

Alternative Fuel Refueling Property Tax Credit (IRC Sec. 30C)

The Alternative Fuel Vehicle Refueling Property Credit is available when businesses install qualified electric vehicle chargers at their property. The tax credit allowed is 30% of the cost limited to a maximum of $100,000 in total. Under the IRA, the qualified refueling property must be in non-urban or low-income areas and the credit has been extended through 2032.

New Energy Efficient Home Credit (IRC Sec. 45L)

The IRA amended IRC Sec. 45L to allow developers and investors an increased credit of $2,500 per single family home sold or leased through an extended date of 2032. The credit doubles to $5,000 per single family unit for homes that are certified to the Zero Energy Ready Home Program. Credits are also available for multifamily homes - $500 for homes certified to Energy Star requirements and $1,000 for homes certified to the Zero Energy Ready Home Program.

Investment Tax Credit (IRC Sec. 48)

The Investment Tax Credit provides a credit for investment in certain energy property. Under the IRA, the credit could increase to 50% provided the project meets prevailing wage/apprentice requirements, domestic content requirements, and a location in an energy community.

The Inflation Reduction Act of 2022 will have a significant impact on the real estate industry. The increased incentives available for the commercial and residential sectors will lower the costs of energy-saving improvements for real estate entities looking to use more environmentally friendly materials. Additionally, buildings that meet certain EPA criteria are "energy star certified" are more attractive to investors and tenants. Now that the IRA has extended most of the incentives through 2032, real estate entities are able to reduce development costs and pass on energy savings to communities.