Which Tax Credits Are Disappearing?

The Real Estate Espresso Podcast

Which Tax Credits Are Disappearing?

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Which Tax Credits Are Disappearing?

Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce.

On today’s show, we’re discussing the changes introduced in the tax bill passed in the US Congress last week. At the heart of these changes is a complex interplay of extensions, modifications, and terminations of various tax credits designed to encourage clean energy investments. The most prominent shifts impact renewable energy. The new legislation particularly targets the inflation reduction tax credits implemented by the Biden Administration.

While the IRS has put considerable capital into clean energy projects through various tax incentives, the latest bill reportedly seeks to accelerate their sunset with a complete end of these credits by the end of 2028. This swift phase-out creates an urgent timeline for projects relying on those incentives. Projects already underway have a degree of grandfathering. The House bill explains that projects under construction for tax purposes at the end of 2024 will be largely unaffected, still qualifying for full tax credits if finished over the next four years.

This provides a certainty window for existing commitments, but for new projects, urgency is essential. To claim a technology-neutral tax credit under sections 45Y and 45E of the US Tax Code, new power plant and battery projects must commence construction within 60 days after the president signs the bill. Swift action and a clear understanding of the new eligibility criteria are necessary due to this deadline.

The legislation also touches on the transferability of tax credits, a key mechanism introduced by the Inflation and Reduction Act that broadly expanded market accessibility for clean energy financing. While the bill doesn’t limit sales of tax credits claimed under sections 45 and 48 for projects under construction by the end of 2024 or some of the newer technology-neutral credits, it explicitly ends the sale of five other types of tax credits, including those for manufacturers and producers of transportation fuels. This selective curtailment of transferability could affect various ESG-focused ventures’ financial models, particularly those involved in supply chain or fuel production initiatives.

Because this is a real estate podcast, let’s consider the implications for real estate in green buildings. For real estate investors, section 179D, the tax changes in the efficient commercial building tax deduction, is a crucial incentive for green buildings, and it continues to be available. The deduction amounts for 2025 are substantial, offering up to $5.81 per square foot for projects savings and prevailing wage apprenticeship requirements. The base deduction, without these additional requirements, is still available at a lower rate. This means that investing in energy-efficient upgrades remains a tax advantage for ESG commitments.

Similarly, for residential buildings, there is the 45L tax credit for energy-efficient residential buildings. This tax credit continues to offer credits for developers of up to $5,000 per dwelling unit—or per apartment—for newly constructed or significantly renovated residential buildings that meet specific energy efficiency standards. These provisions suggest that while large-scale renewable energy faces a tighter deadline, the incentives for energy efficiency within the built environment remain strong.

In order for a project to qualify for the 45L tax credit, construction must commence by May 12th of this year. As this is a critical date, it’s worthwhile discussing the IRS’s guidance on what constitutes commencing construction for tax credits. It involves more than just receiving permits or planning and falls under one of two tests. For both, there is a continuity requirement, meaning you can’t start and stop.

The first test is the physical work test. It requires that significant physical work has begun. The focus is on the nature of the work, not just the amount or cost. It can include site work, such as the installation of foundations, framing or other structural elements. It can also include off-site work such as custom components for a project like prefabricated wall panels. However, preliminary activities like planning or designing the project, securing financing, obtaining permits, and site clearing, such as tree removal, do not count. They are not considered to be work started or construction commenced.

The second test is the 5% safe harbor test. Construction is considered to have begun if a taxpayer has paid or incurred 5% or more of the facility’s total cost by the relevant deadline. This test focuses on the financial commitment rather than physical work. It is important that that 5% is a legitimate cost incurred, not just a deposit that could be refunded.

There is, of course, the continuity requirement. Regardless of the test met, the IRS requires the taxpayer to maintain a continuous construction program or continuous efforts to advance a project to completion. While this is determined by the facts and situation, the IRS provides guidelines that can help you determine which test will be the most useful for you.

There are some quite lucrative tax incentives that are about to sunset and meeting those deadlines is critically important. Thus, it is important for you to determine whether you are going to meet those deadlines.

As you think about that, have an amazing rest of your day. Go make great things happen, and we’ll talk to you again tomorrow.

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