On August 16, President Joe Biden signed into law the Inflation Reduction Act (IRA), a $437 billion package of spending on health care, energy, and climate initiatives.
Even as a scaled-down version of the Build Back Better bill (which would have totaled $2 trillion and which was a centerpiece of Biden’s legislative agenda), it’s the most significant climate legislation the country has ever passed.
The climate section of the IRA includes various provisions that are of great significance for homeowners and real estate investors, especially those with an eye on their carbon footprint or those who have been looking to upgrade outdated heating and cooling systems and improve their homes’ insulation.
By doing so, investors may furthermore increase the potential resale value of their homes.
The IRA includes some $437 billion in investments over the span of a decade. It aims to encourage consumers to invest in electric vehicles and push electric utilities toward renewable energy sources like solar power or wind.
The IRA puts the U.S. on track to reduce its carbon emissions by 40 percent from 2005 levels, according to one estimate.
Addressing emissions in the housing industry will be hugely significant, since the residential sector accounts for more than 20 percent of U.S. energy consumption, according to the U.S. Energy Information Administration.
Taxes: good news and bad news
All that spending has to be paid for somehow. The IRA will raise money partly by imposing a corporate minimum tax on very large corporations. Small business owners and real estate investors are not likely to see their taxes go up.
The other good news for some real estate investors is that, thanks to the efforts of Arizona Senator Kyrsten Sinema, the carried interest loophole remains untouched.
Through this legislation, some real estate syndicators, fund managers, and other professionals are paid in this way, and are taxed at the capital gains rate, which is much lower than the ordinary income rate.
The IRA does, however, give considerably more teeth to a long-underfunded Internal Revenue Service. Tax audits have been at historic lows, but the agency will receive nearly $80 billion in funding over the next decade.
Currently staffed with about 78,000 workers, the agency is expected to hire about 87,000 new agents, allowing it to greatly increase its auditing power.
Investors who claim real estate professional status or the short-term rental loophole may come in for increased scrutiny.
Since well-off filers have armies of experts helping to defend their interests, it may be that middle-class filers will get more love letters from the IRS.
As always, thorough record-keeping ahead of any potential audit, not in response to one once it happens, is advisable.
But there remain many good ways to find tax advantages in real estate investing. For example, bonus depreciation is beginning to wind down in 2023.
What are the tax breaks and rebates for green renovations?
The bill includes rebates and tax breaks for property owners to add electrical appliances for heating and cooling their homes when renovating their properties, including rooftop solar panels, electric HVAC, and electric water heaters.
To qualify products generally have to meet Energy Department standards.
The potential tax savings for homeowners would be an estimated $1.6 billion in 2023 alone, up from an estimated $253 million in 2022 for the old credit, according to estimates by the Congressional Budget Office.
Over the 10 years the bill is in effect, that figure could rise to $14.5 billion.
The legislation provides for $9 billion in energy rebates. Part of that is the $4.28 billion High-Efficiency Electric Home Rebate Program, which provides a rebate of up to $8,000 for property owners to install heat pumps.
These are electrical appliances that can both heat and cool homes and, since they do not rely on combustion, are more efficient than traditional furnaces.
Those who don’t qualify for rebates can get a tax credit of up to $2,000 to install heat pumps.
It also provides a rebate of as much as $1,750 for water heaters that are driven by heat pumps.
Homeowners may qualify for as much as $840 to offset the cost of a heat-pump clothes dryer or an electric stove.
To support all these electric appliances, many property owners will find they need to upgrade their electrical panels. The program provides a $4,000 rebate for that purpose.
Furthermore, heat pumps work best in a well-insulated home; the IRA provides a rebate of up to $1,600 to insulate and seal a house, and a rebate of up to $2,500 for upgrades to electrical wiring.
“Taxpayers can budget out different energy-efficient upgrades over a 10-year period,” Vincent Barnes, senior vice president of policy and research at the nonprofit Alliance to Save Energy, told the Wall Street Journal. “Insulation one year. Windows and doors another year.”
The program is to be run by the states, and it lasts through Sept. 30, 2031. The maximum that can be collected by any one homeowner would be $14,000 in rebates.
It may be true that investors are unlikely to install solar panels solely in order to reduce energy bills, since they are likely to pass on those costs to their renters anyway.
But some say that innovations like solar panels and heat pumps and electric vehicle charging stations, as well as, offering to include utilities in rent, can be attractive to tenants.
The legislation reintroduces a 30 percent tax credit for installing solar panels and extends the program through the end of 2034.
The tax credit would go down to 26 percent for solar panels installed after Dec. 31, 2032 and before Jan. 1, 2034. Those who install solar battery systems with at least three kilowatt-hours of capacity would qualify for the tax credit.
For example, if an investor who qualifies for the credit and meets the wage and apprenticeship rules installs a new $20,000 solar panel system on a U.S. rental duplex, the IRS will pay for 30 percent of the cost of the system, or $6,000.
Making this benefit even more appealing is that the panels get depreciated over just five years, even though they will likely last as long as 30 years. The investor must hold on to the property for at least five years, or the IRS will recapture the credit.
If the owner installs the panels in a low-income community, the IRA ups the credit by 10 percent. If the investor installs the panels on a qualified low-income residential building project, that goes up by 20 percent, and there are bonus credits for installing panels in an “energy community” (think West Virginia coal country).
EV charging stations
Property owners in low-income areas and rural communities who have had an eye on installing new electric vehicle charging stations will want to take a close look at the Alternative Fuel Refueling Property Credit, which is in effect between January 1, 2023 and December 31, 2032.
For example, the owner of a small office building in a low-income community installs 10 EV chargers in the building’s parking lot for $3,500 each (including parts and labor).
If they qualify for the credit and meet the wage and apprenticeship rules, they can get the IRS to pay for 30 percent of the cost of the chargers, or $10,500.
The charger must be located in the U.S., and it must be new. If wage and apprenticeship rules aren’t met, the credit is much less, only 6 percent.
The credit maxes out at $100,000 per item of property. (Previously, the limit was only $30,000, and it was per property, not item.)