Laurel Blatchford, Chief Implementation Officer
Luke Bassett, Director of Policy and Program Impact
As communities around the United States implement solutions to housing shortages, building developers, owners, and operators have new or expanded tools created by the Inflation Reduction Act’s historic investments to reduce costs for some of the most important aspects of residential buildings. Whether building new, substantially reconstructing, or rehabilitating existing multi-family residential buildings, developers and contractors may now be eligible for several building-related tax incentives and other financing tools that will ultimately help homeowners and renters cut energy costs. At the same time, these incentives will help make buildings more efficient, more climate resilient, and less carbon-intensive. Housing stakeholders, from residents to community leaders, may also benefit from awareness about these tax incentives because they may be used across a wide variety of housing types.
Incentives to Consider for Multifamily Residential Buildings (discussed below)
- New Energy Efficient Home Credit (Section 45L)
- Energy Efficient Commercial Buildings Deduction (Section 179D)
- Energy Credit (Section 48)
- Low-Income Communities Bonus Credit Program (48(e))
- Alternative Fuel Vehicle Refueling Property Credit (30C)
- Rebates through State Governments
Efficiency Incentives
For developers and contractors, the IRA expands the New Energy Efficient Home Credit (45L), which now provides a tax credit for new or substantially reconstructed and rehabilitated single-family or multifamily homes that meet certain ENERGY STAR or Zero Energy Ready Home Program energy efficiency standards. For multifamily homes, depending on the standards and whether prevailing wage requirements are met, the credit ranges from $500 to $5,000 per dwelling unit. The credit can be claimed the year the units are leased or sold.
- For example, if a contractor substantially reconstructs and rehabilitates an underutilized commercial building into a 100-unit affordable multifamily building that is eligible to participate in the ENERGY STAR Multifamily New Construction Program and is certified as a zero energy ready home under the Zero Energy Ready Home Program requirements, and the substantial reconstruction and rehabilitation meets the prevailing wage requirements, the contractor may be able to receive up to $5,000 per dwelling unit in credits, or up to $500,000 for a 100-unit building overall.
For building owners or designers of energy efficient property including a building owned by tax-exempt or certain governmental entities, including Indian tribal governments, the IRA expands the Energy Efficient Commercial Buildings Deduction (179D). The deduction is for commercial buildings and multifamily buildings greater than 3 stories in the United States that install energy efficient building envelopes; heating, ventilating, and air conditioning (HVAC) systems and hot water systems; or interior lighting systems. To be eligible for the deduction, improvements to a building must result in a minimum of 25% energy and power cost savings The deduction rate increases with greater improvements to the building’s energy efficiency up to $1.00 per square foot. The deduction amount increases fivefold if the installation of energy efficient property meets the prevailing wage and apprenticeship requirements.
- If a building owner would like to immediately deduct the cost of eligible energy efficient improvements, the building owner may claim a deduction for eligible building systems, including the building envelope, HVAC and hot water systems, and interior lighting systems, for a certain amount of total costs.
Under the Home Energy Rebates, the IRA also provides $8.8 billion to states, territories and tribes for Home Efficiency Rebates and Home Electrification and Appliance Rebates. As states, territories and tribes develop these programs in partnership with the U.S. Department of Energy, they will consider how to help building owners and others make upgrades to heat pumps, HVAC units, water heaters, circuit panels, wiring, and insulation more affordable. These rebates will help multifamily building owners cover many of the project costs for qualifying energy efficiency retrofits. At least 10 percent of rebate funds must go to support upgrades in low-income, multi-family buildings.
- Under the Home Efficiency Rebates program, if a building owner with a majority of low-income tenants installs an ENERGY STAR-certified window and high-efficiency electric heat pump water heater in each of the building’s 100 units, the project could be eligible for a per-unit rebate of up to $8,000, or up to 80% of the project costs, depending on the level of energy savings achieved.
Clean Energy and Alternative Fuel Vehicle Refueling Property Incentives
The IRA modifies and extends the Section 48 Energy Credit (“ITC”), a tax credit for up to 6% of eligible costs for multiple types of electricity generation and energy efficiency equipment that multifamily buildings may host and use, such as geothermal, solar, batteries, and more. The ITC is increased to 30% of eligible costs when prevailing wage and apprenticeship requirements are met. The law also established increased credit amounts for the ITC that incentivize economic development in energy communities, domestically manufactured components for projects, and a bonus credit for solar and wind facilities benefitting low-income communities through the Low-Income Communities Bonus Credit Program.
- For example, if a building owner installs a 150-kilowatt solar array that will generate 80% of the building’s electricity, 30% of project’s costs might be covered under the ITC. If the energy property or facility is eligible for the Low-Income Communities Bonus Credit Program, the property owner may apply for the bonus. If the energy property or facility is located in a low-income community or is located on Indian land, it may receive a 10 percentage point bonus credit amount. If the energy property or facility is part of a qualified low-income residential building project or is a qualified low-income economic benefit project, it may receive a 20 percentage point bonus credit amount.
- To recap: a building owner installing qualifying energy equipment and satisfying the prevailing wage and apprenticeship requirements may be eligible for:
- The 30% ITC;
- An additional 10 percentage point bonus credit amount if the energy project is located in an energy community;
- An additional 10 percentage point bonus credit amount if the energy equipment meets domestic content requirements; or
- An additional 10 to 20 percentage point low-income communities bonus credit amount for facilities located in low-income communities, on Indian land, part of affordable housing, or directly benefiting low-income households if allocated a bonus through the § 48(e) application process.
Additionally, the IRA expands and modifies the Alternative Fuel Vehicle Refueling Property Credit (30C) to include charging stations for 2- and 3- wheeled vehicles and bidirectional charging equipment. It also limits the credit to property placed in service within low-income communities or non-urban census tracts. When considering transportation options for potential residents of multifamily housing, a building owner or developer installing qualifying alternative fuel vehicle refueling property and meeting prevailing wage and apprenticeship requirements may be eligible for a 30% credit, up to $100,000 for each item of refueling property.
A building owner may be eligible for multiple incentives. For example, the IRA eliminates the basis reduction for “stacking” (or combining) the ITC, section 45L credits and the 42 Low-Income Housing Tax Credit, so builders, developers, and contractors can unlock the full potential of these tax credits when investing in underserved communities. These incentives provide new opportunities to reduce development costs and deliver energy savings to communities. Further guidance on the incentives will be forthcoming. You can find more information about the IRA’s tax incentives and broader housing-related incentives.