Environmentally Friendly Tax Credits for Your Property

[Julio Gonzalez]

As we work towards becoming more green, did you know there are actually two energy efficient solutions that you can utilize with your real estate property? And better yet, you get tax credits and tax deductions for utilizing them. Talk about a win-win. These solutions are known as 179D tax deductions and 45L tax credits.

Okay, so what are 179D tax deductions and what types of properties qualify for the deductions?

This is a $1.80 per square foot tax deduction for making energy efficient improvements to commercial buildings. The tax deduction could go up slightly due to inflation. This is a tax deduction that can be claimed by building owners, architects, engineers and construction companies.

Properties that qualify for this deduction include multifamily properties that are four stories or more, commercial buildings (including parking garages and warehouses) and government-owned buildings (including libraries and public universities).

To be eligible, the improvements must reduce power and energy costs of the building by 50% or more. There are partial deductions allowed in which you could receive a deduction of $0.60 per square foot. This includes:

• 25% energy savings for interior lighting systems
• 15% energy savings for heating, cooling, ventilation and hot water systems
• 10% energy savings for the building envelope

This deduction reduces your properties taxable basis.

How do 45L tax credits work and what types of properties are eligible for the tax credits?

It is a $2,000 tax credit per dwelling unit if you implement improvements with energy usage levels that are significantly less than national energy standards. This includes new buildings or renovations. In order to obtain the credit, you must be a developer, builder or homeowner of that property. For the property to qualify, it must be sold, leased or rented. The credit can be claimed retroactively for properties that you’ve bought or remodeled in the past 3 years and any unused credit is then carried forward.

Multi-family and single-family dwellings that are one to three stories and that have higher energy efficiency that the 2006 IECC are eligible. This also includes townhouses, condominiums, apartment buildings and assisted living facilities. The property’s design must be for occupancy of one or more rooms including a living room, kitchen, and sleeping chambers.

In order to obtain this credit, the units must consume at least 50% less energy through HVAC functions than that of an identical unit that is non-energy efficient. The building envelope is required to account for 1/5th of the improvement. The envelope must consume 10% less energy through HVAC functions than that of an identical building that is non-energy efficient.

Have you utilized either of these green tax strategies?