The Inflation Reduction Act's Impact on Commercial Real Estate

Coastline Equity is excited to share valuable information about the IRA and the accompanying tax deductions for energy-efficient commercial buildings. This tax deduction can significantly benefit commercial property owners and tenants, and we are here to help you navigate this opportunity.

Coastline Equity is dedicated to keeping our clients informed about the latest developments in the real estate industry, particularly those that have significant implications for commercial property owners and investors. The IRA, passed as part of the $1.7 trillion budget reconciliation, includes $369 billion in new programs and expanded tax incentives to promote energy efficiency and reduce carbon emissions in the building sector.

The IRA's Impact on Commercial Real Estate:

The key provisions of the IRA that affect the commercial real estate sector include:

1. A revised and expanded Energy Efficient Commercial Buildings Tax Deduction (Section 179D)
2. The Section 48 investment tax credit (ITC)
3. A tax credit for the installation of electric vehicle charging stations (Section 30C)

These incentives are designed to help the building sector make substantial contributions to reducing the nation’s carbon footprint by 40% by 2030, compared to 2005 levels.

Section 179D:

The IRA made significant changes to Section 179D to make it more valuable and accessible for commercial real estate owners and developers. The tax deduction now ranges from $2.50 to $5.00 per square foot, depending on the energy efficiencies achieved over the baseline of current ASHRAE standards. For existing buildings, energy-efficiency gains are measured against the energy baseline of the individual building, making retrofits of existing buildings more likely to be eligible for Section 179D tax benefits.

In addition, the IRA allows real estate investment trusts (REITs) to reduce their earnings and profits by the amount of the Section 179D deduction, resulting in immediate financial benefits for their shareholders. However, the increased benefits apply only to owners who pay workers prevailing-wage rates for their jurisdictions. Those who do not will receive a maximum benefit of $1.00 per square foot, a reduction from the previous $1.80 per square foot.

Sections 48 and 30C:

The IRA also expands the potential uses of the Section 48 Investment Tax Credit (ITC) for real property developments, adding expenses connected with improved energy storage, dynamic glass, biogas, and other energy-efficiency-related investments. The ITC is a sliding scale, with increasing value tied to non-energy-efficiency factors such as payment of prevailing wages, meeting "made in the U.S.A." statutory requirements, and project location.

Furthermore, the IRA extends the Section 30C tax credit for electric vehicle (EV) charging stations through 2032. The credit is capped at $100,000 per station and is transferable to a third party by an owner who may have insufficient tax liability to make use of it.

The Future of Energy Efficiency in Commercial Real Estate:

With the introduction of the IRA, the real estate industry is poised to make even greater strides in reducing energy usage and greenhouse gas emissions in commercial structures. The incentives offered by the IRA, combined with voluntary government programs like the Energy Star program and Portfolio Manager, will further accelerate the trend toward improved energy usage and reduced emissions in the commercial real estate sector.

While the Inflation Reduction Act offers various incentives and opportunities for commercial real estate owners and investors to improve energy efficiency and reduce carbon emissions, it is essential to note that the information provided in this blog post is for informational purposes only and should not be considered as tax or financial advice. We strongly recommend consulting with a tax professional to discuss your specific situation and to determine how the IRA's provisions may impact your commercial property investments. If you need assistance finding a qualified tax professional, Coastline Equity is more than happy to provide recommendations.

Our primary goal is to help our clients make informed decisions and maximize the value of their commercial properties. Don't hesitate to reach out to our knowledgeable team at Coastline Equity for assistance with property management, investment strategies, and navigating the ever-changing landscape of the commercial real estate industry.