INCENTIVES FOR HOME DEVELOPERS/BUILDERS
Last year's Inflation Reduction Act (IRA) revived the federal tax credit for new energy-efficient homes, which had expired at the end of 2021, and extended it through 2032. Previously, eligible developers and builders of both single and multifamily homes were entitled to a credit up to $2,000 ($1,000 for most manufactured homes) for each new unit that meets specified energy-efficiency standards.
Starting this year, increased credits are available, although homes must meet more stringent standards to qualify for them. The credit is increased to $2,500 for single-family and manufactured homes that meet ENERGY STAR® guidelines and doubled to $5,000 for homes that meet Zero Energy Ready Home (ZERH) requirements.
Multifamily homes that meet ENERGY STAR® guidelines are eligible for a credit of $500 per unit, increased to $1,000 for units that meet ZERH requirements. These credits are increased fivefold to $2,500 and $5,000, respectively, for development projects that meet prevailing wage and apprenticeship requirements.
Related Read: The Inflation Reduction Act Includes Wide-Ranging Tax Provisions
Energy-Efficient Home Improvement Credit
This incentive allows homeowners to claim a federal tax credit based on the cost of certain energy-efficient home upgrades. Before this year, the credit was 10% of costs up to a $500 lifetime cap, but the IRA increased it to 30% of costs up to $3,200 per year.
Qualifying expenditures include:
- Improvements to the building envelope such as exterior doors, windows and insulation;
- Installation of energy-efficient air conditioners, water heaters or boilers;
- Electrical panel upgrades;
- Home energy audits; and
- Heat pumps and biomass stoves and boilers.
Separate annual limits apply to various types of expenditures listed above. For example, the credit for exterior doors is 30% of the cost up to $250 per door, up to $500 total. The credit for air conditioners, water heaters and boilers is 30% of costs, including labor, up to $600 each item.
Overall, the maximum annual credit is $1,200 plus an additional $2,000 limit for heat pumps, biomass stoves and biomass boilers.
Residential Clean Energy Credit
The IRA extended this incentive, formerly known as the Residential Energy Efficient Property Credit, through 2034. It provides a federal tax credit equal to 30% (previously 26%) of the cost of qualifying clean energy equipment, including solar panels and water heaters, fuel cells (additional limits apply), wind turbines, geothermal heat pumps, and battery storage technology. The credit percentage rate drops to 26% in 2033 and 22% in 2034.
INCENTIVES FOR COMMERCIAL BUILDING OWNERS
The IRA expanded the federal tax deduction for energy-efficient commercial buildings. Previously, owners could deduct up to $1.88 per square foot for eligible improvements to a building's interior lighting system, HVAC/hot water systems and building envelope designed to reduce annual energy costs by at least 50% relative to certain benchmarks (partial deductions were available for improvements to one of these systems).
The IRA reduced the energy savings target from 50% to 25%. Now the deduction is based on a sliding scale from 50 cents per square foot to $1 per square foot for projects that generate energy savings ranging from 25% to 50%. The deductions are increased fivefold to $2.50 and $5 per square foot, respectively, for projects that meet prevailing wage and apprenticeship requirements.
Owners may claim this deduction as frequently as once every three years. Previously, the $1.88 per square foot limit was a lifetime cap.
STATE AND LOCAL INCENTIVES
Be sure to investigate additional energy-efficiency incentives available in your state or locality, such as tax credits, low-interest loans and utility rebates. Illinois, for example, is one of a handful of states with a Solar Renewable Energy Credit (SREC) program. Homeowners who install solar energy systems receive one SREC for each 1,000 kilowatt-hours produced by their solar panels. They can then sell these credits to their local power companies to help those companies meet state standards that require them to generate a portion of their electricity from renewable sources. Homeowners are paid up front, based on the amount of renewable energy their systems are expected to generate over the first 15 years of operation.
Related Read: Greening Your Projects Can Bring In More Green
DON'T LEAVE MONEY ON THE TABLE
These are just a few examples of the many financial incentives available to real estate developers and owners who invest in energy efficiency. To reap the benefits of these incentives, you need to ask for them. To avoid leaving money on the table, ask your ORBA advisor to help you determine which incentives are appropriate for your business and show you how to claim them.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.