The 179D tax deduction and 45L tax credit are energy efficient tax incentives that can be applied in commercial and residential real estate. While these both have to do with improving the energy efficiency of a property, the now permanent 179D deduction is related to commercial real estate and is an allowed deduction up to the amount of shareholder basis in the property; while extended through December 2021, the 45L credit applies to residential real estate and is useful to home builders and multifamily developers.
The 179D deduction allows commercial property owners to claim a tax deduction of up to $1.80 per square foot of both new and existing structures. If the lighting, HVAC, or building envelope (insulation) is reducing the energy cost by an amount determined by the ANHRAE standard, which may be only a savings reduction of as little 10%, the property can qualify for the deduction. The 179D is unique in that the tax deduction is worth $0.60 per square foot if it meets requirements for each improvement: the lighting, HVAC, or building envelope. The energy efficient improvement could just be updating the lighting in a warehouse or apartment building over 4 stories, which could be a possible deduction up to $0.60 per square foot.
The 45L tax credit is an all or nothing $2,000 per unit credit that can apply to newly built apartment buildings, homes, or generally any single or multifamily unit that is under 3 stories above grade. Significant reconstruction or rehabilitation of properties can also qualify for the credit. If a 3 story 50-unit condo or apartment property was constructed and is 50% below the energy consumption of comparable units using efficient roofs, windows, HVAC, insulations, and more, then a tax credit would be issued for each qualifying unit totaling $100,000 of tax credits.
Many specific rules apply to both the 179D and 45L, which are too comprehensive to be covered in this article; but if you would like more detailed analysis on the 179D or 45L, let us know. Some careful planning at the beginning of a project with professionals in the field will make the seeming complicated 179D deduction or 45L credit attainable. The bottom line is that if you are significantly renovating or building new and using energy efficient products and practices there is strong possibility that you may qualify for either the 179D deduction for commercial properties or the 45L credit for residential properties.