Federal Tax Incentives for Energy Efficient New Construction and Upgrades

The new 179D Tax Deduction for Energy Efficient Retrofits ("Alternative Deduction") aligns perfectly with NGBS Green certification for existing buildings. Buildings seeking NGBS Green certification at the Silver level must demonstrate at least a 25% reduction in energy consumption. If the building is older than five years, it can also qualify for the new 179D tax deduction if the building can show demonstrated savings of at least 25% relative to the building's pre-retrofit site energy usage intensity (EUI) baseline. And, additional incentives are stackable. The same building can stack the HUD Green MIP reduction (which brings the MIP down to 25 bps from 40-52 bps) AND the IRA Section 48 Investment Tax Credit (for qualifying technologies, such as solar and geothermal) AND the IRA 30C Tax Credit for EV Charging Stations. Additional incentives that can be stacked on top of these include any state and local incentives, Fannie and Freddie preferred green financing, and even the LIHTC incentives. Cha-ching!

The legislation does not specify how building owners should calculate the pre-retrofit site energy usage intensity (EUI) baseline if the building is vacant and/or a conversion from a use other than residential -- e.g., an industrial building being converted into an apartment building. Home Innovation Research Labs and other industry groups have asked the IRS to provide guidance for these situations, and we are hopeful that guidance will be forthcoming shortly.

More building types are now eligible with the new 179D Alternative Deduction than the old deduction, as well. Previously, buildings were required to demonstrate their eligibility using ASHRAE Standard 90.1, which didn’t apply to buildings under four stories. But now there are more options. As an example, rental properties over five years old that are retrofitted to meet the 25% energy efficiency improvement over the baseline are now eligible, even if they are three-story garden apartments, townhomes, or single-family homes. That’s big news for any of the large rental home companies with significant portfolios of older housing stock that could benefit from retrofits to be more efficient.

Also, because the new deduction allows demonstrated savings to be calculated from the building's own specific pre-retrofit site energy usage intensity (EUI), more buildings will be able to meet the IRA’s efficiency requirements for eligibility. The former 179D tax deduction required buildings to demonstrate a sizeable efficiency improvement over a relatively recent 90.1 baseline. So now older buildings, especially those with renovation restrictions stemming from historic elements (e.g., facades, windows), can now more easily meet the improvement based on the building’s specific efficiency baseline when they would not have been able to be meet the improvement above the 90.1 baseline.

BOTTOM LINE: Building owners seeking NGBS Green Existing Building certification at the Silver level can stack multiple incentives for renovations that make the building more energy efficient. The incentives will significantly improve the ROI on the building improvements and even make it more cost effective to achieve higher levels of efficiency.

The revised 179D deduction for energy efficient buildings requires modeled savings at least 25% more efficient than the ASHRAE 90.1-2007 baseline to qualify for the incentive on a sliding scale. This aligns well with NGBS Green certification at the Silver level, as illustrated in our 2015 & 2020 NGBS Energy Performance Comparison – Mid- and High- Rise Multifamily chart.

As noted above, the incentives are stackable, which provides developers lots of flexibility to achieve higher energy efficiency levels by assembling multiple incentives.

In addition to 179D, the IRA as written seems to also allow new multifamily buildings to qualify for the 45L tax credit if the building is certified to the ENERGY STAR for Multifamily program. Even more funding is available if the building meets the yet-to-be-released DOE Zero Energy Ready program for Multifamily. This is another area where multiple stakeholders have asked the IRS for confirmation that a building is indeed eligible for both 179D AND 45L, but the simple reading of the legislative language is that buildings would be eligible for both.

New homes are eligible for the revised 45L tax credit if they are certified to the ENERY STAR New Homes Program, and there is a significant bonus credit if the home is certified to the DOE Zero Energy program.

Builders seeking NGBS Green certification for their new homes will also find a lot of alignment with the 45L tax credit. Homes earning ENERGY STAR certification can use the NGBS 701.1.4 Alternative Bronze or Silver Path to demonstrate compliance with the NGBS’s energy efficiency requirements, and then only need to implement the additional practices for Lot Selection, Resource Efficiency, Indoor Air Quality, Water Efficiency, and Homeowner Maintenance to earn certification. So a builder could earn the $2,500 tax credit, and simultaneously earn an NGBS Green certificate for the home, which can be marketed to prospective homebuyers and used to potentially gain a higher valuation via the Green Appraisal Addendum.

You can find more information about all the NGBS energy efficiency options in this recent blog.

To help builders step up from ENERGY STAR or DOE ZERH certification to earn NGBS Green Certification, Home Innovation collaborated with the DOE ZERH team to publish a Bronze Cookbook that identifies the ENERGY STAR, Indoor airPLUS, and ZERH provisions that contribute to NGBS compliance and commonly-selected practices to bridge the gap to certification.