Decarbonizing real estate is crucial in fighting the climate crisis, and with the federal government encouraging building owners through the Inflation Reduction Act to do their part, the industry has many details to examine. In August 2022, the government passed the act, which includes $370 billion over 10 years, an ambitious and historic initiative to help the real estate sector produce and invest in clean energy. An ever-increasing number of lawmakers and building owners recognize that a significant amount of carbon emissions comes from real estate.
Although the IRA includes several direct funding opportunities, such as rebates and grant programs, another untapped well exists here in the forms of sizable tax credits and deductions. The largest incentive opportunities can be leveraged for projects that include energy efficiency, electrification, EV charging, and renewable energy (including storage), and stacking of these incentives can bring overall project costs down significantly. Detailed guidance continues to flow from the U.S. Treasury and the IRS, but several funding opportunities exist today that can greatly improve your project’s ROI while simultaneously decreasing greenhouse gas emissions.
Growing demand
The demand for power is going to continue growing, and Ben Evans, federal legislative director with the U.S. Green Building Council, says the real estate community must address how it plans to meet this demand efficiently.
Despite some similarities, the IRA funding differs from past federal funding programs. Among the current incentives and programs for buildings, most of the funding available in 2023 focuses on tax breaks instead of grant funding, ranging from incentives for on-site renewables and electric vehicle charging stations to energy storage and microgrids.
Evans also calls the IRA funding an “all-you-can-eat buffet.” “You don’t have to pick one. There are lots of grants and tax incentives that can be taken together and stacked.”
The IRA also focuses on public/private partnerships and leveraging private capital. There is even a guide for local government leaders—published by C40, a global network of about 100 mayors working to confront climate change—that touts the massive infusion of federal funding, which aims to help reduce emissions by 32 percent–40 percent before 2030.
The new real estate decarbonization opportunity
Recognizing that real estate has a critical role in helping to decarbonize cities, Kate Johnson, head of U.S. Federal Affairs at C40 Cities, says that several C40 cities have led initiatives to partner with the real estate industry and advance their joint decarbonization strategies, including New York City’s Building Energy Exchange; Washington, D.C.’s Building Innovation Hub; and the newly launched Chicago Building Energy Resource Hub.
“In many U.S. cities, the energy used in buildings is the largest source of climate pollution,” Johnson says. Real estate and city leaders can partner together on strategies to advance carbon-free buildings that are not only less polluting but also healthier, more affordable, and resilient to the impacts of climate change.
With the amount of new information steadily coming out, discerning and keeping up with the most relevant opportunities to pursue can be difficult. Here are the top four major IRA funding opportunities available today:
Energy efficiency
Section 179D is an expanded tax deduction with major changes, in that it no longer benefits only new construction buildings and larger retrofit projects. Commercial or high-rise residential building efficiency improvements, including multifamily buildings with at least four or more floors, are now eligible. There is more awareness now around improving existing buildings and how accelerating ways to retrofit them will be key. “Older buildings use a lot of energy. We need to invest in those and get them more energy efficient,” Evans says.
Kent Peterson, chair of ASHRAE’s Task Force on Building Decarbonization, notes that typical commercial structures and buildings such as churches can now benefit, as can various nonprofit organizations. “This deduction has almost tripled, from $1.80 per square foot [0.09 sq m] to $5.00 per square foot,” he says, adding that many of the updates are designed to incentivize a broader range of building owners and stakeholders to invest in energy efficiency and decarbonization projects.
Section 179D aims to help reduce energy consumption between 25 percent and 50 percent compared to baseline energy use. Any combination of interior lighting; HVAC and hot water systems; and roof, windows, and insulation that occurred after December 31, 2022, is eligible for the deduction.
This tax deduction for energy efficient buildings is a sliding-scale deduction, according to the Real Estate Roundtable. The organization explains that the minimum efficiency gain eligible for the deduction is 25 percent, and with higher levels of building efficiency the amount increases. This formula translates to each percentage point correlating to a two-cent increase in deduction.
Specific guidelines apply for new construction and retrofits. For example, new construction must have a minimum of 25 percent more efficiency over the ASHRAE 90.1 baseline, and a building must be at least five years old to quality for the retrofit deduction.
Section 45L applies to new or restructured energy-efficient, single-family homes that meet either Energy Star or the Department of Energy’s Zero Energy Ready Home (ZERH) program requirements. Evans explains that “[45L] was significantly expanded in several ways under the IRA” so that it now applies to all multifamily properties of any size, instead of being capped at three-story structures. Single-family homes can get $2,500 for Energy Star and $5,000 for ZERH. Multifamily buildings can get a tax credit between $500 and $5,000 per unit, with the largest credit for ZERH and prevailing wage requirements. Manufactured homes can also receive a credit of $1,000 per unit.
“So, those are two pretty lucrative things,” Evans says. “If you have a 25-unit building you’re talking about a hefty tax credit. That’s the real money.”
The difference between the two programs is that under Energy Star, a home must be a certain percentage more energy efficient than an average home. The Department of Energy explains that, with the new ZERH program, the home must operate at such high performance that a renewable energy system could offset most or all the home’s annual energy use.
Renewable energy and storage
Section 48 was updated and expanded to help make installing and operating renewable energy projects more affordable. It applies specifically to clean electricity and gives tax credits for buildings that generate electricity from renewable sources. The Real Estate Roundtable notes that Section 48 now covers energy property—things once covered by a previous law—such as solar panels, microturbines, and geothermal heat pumps. Although solar is the most popular common way to qualify, other types of energy equipment are also included.
Before the IRA, standalone energy storage projects such as thermal energy storage, dynamic glass, microgrid controllers, biogas property, linear generators, and “interconnection property” linked to the electric grid did not qualify for a credit unless done in conjunction with installing a solar generation facility and in avoidance of a few other restrictions.
Although in 2023 the base credit is 6 percent, it can reach 30 percent for some projects, depending on such factors as the type of energy property, whether new prevailing wage and apprenticeship requirements are met, and if a project is in a low-income, tribal land, or energy community.
Alternative fuel and electric vehicle infrastructure
Section 30C is a revamped alternative fuel property credit for buildings that install electric vehicle charging or other types of alternative fuel stations between January 1, 2023 and December 31, 2032. The goal here is to help more people use electric vehicles to improve the energy efficiency of communities. The original program expired in 2021, but IRA funding renewed it for 10 years, with several stipulations.
The credit amounts to 6 percent of the cost of the qualified property, up to $100,000 per item of property. This credit has geographic requirements stipulating the property must be in an eligible census tract that includes a low-income community, based on density. The IRS anticipates publishing more guidance and maps soon.
These powerful IRA incentives to decarbonize are great, even at their base amounts, but if you can meet prevailing wage and other stipulations in your project, the incentives can multiply to become foundational sources of revenue for that project. Note that the amounts of certain incentives for Section 30C, Section 48, and Section 179 increase fivefold if the project also meets specific wage and apprenticeship requirements.
Maximizing returns
Peterson says the highest value-driven decarbonization projects will layer these tax deductions and credits with modified accelerated cost recovery system (MACRS) and bonus depreciation offerings to drive down the project’s costs, thus allowing for shorter simple payback periods for decarbonization technology.
Although tax professionals will ultimately be the best resource for applying these tax credits and deductions to specific projects, ULI will continue providing resources to guide real estate to relevant federal funding opportunities to decarbonize.
