It may be said that when President Biden signed the Inflation Reduction Act of 2022 (“IRA”) into law on August 16, 2022, a new “Green” era began. The IRA is the most comprehensive and ambitious attempt to combat climate change in US history, with over $360 billion in climate provisions dedicated to accelerating the country’s transition to clean energy, reducing greenhouse gas emissions by half in 2030, and reaching net zero by 2050. Among the many incentives and initiatives in the IRA, three key provisions stand out for their potential impact on real estate development and investment: the Energy Efficient Tax Credit, the Energy Efficient Commercial Building Deduction, and the solar and renewable energy credits. These measures offer billions of dollars in tax breaks and deductions, making it easier and more financially attractive for developers and investors to pursue environmentally sustainable projects.
§45L ENERGY EFFICIENT TAX CREDIT
About 40% of total carbon emissions are estimated to come from real estate construction and home operations. So, Congress recognized that a fundamental key to combating the climate crisis might have to start there. You are in luck if you are a home builder or a homeowner. The §45L tax credit of $2,000 that expired on December 31, 2021, was once again revived by the IRA. The §45L tax credit is a federal tax credit offered to builders, developers, and homeowners to develop new residential units that meet energy-efficient building standards or remodel existing residential units to meet energy-efficient building standards. The new law retroactively extends the §45L tax credit for ten more years through December 31, 2032. This means you may again be eligible for the §45L tax credit on energy-efficient homes meeting specific standards.
In addition to extending the credit, the IRA increases the maximum credit from $2,000 to $5,000. Starting January 1, 2023, units sold or leased that are Certified Star Energy or Zero Energy Ready Homes Certification and meet the specified prevailing wage and apprenticeship requirements will qualify for the $5,000 credit.