How the Inflation Reduction Act of 2022 Will Impact Real Estate Developers

By: Jake Patton; Jenny Deichsel

At a glance

• The main takeaway: The Inflation Reduction Act of 2022 is scheduled for a final vote in the House of Representatives on Friday, August 12, 2022. While the act has several proposals that will impact most high-income taxpayers, there are some specific provisions that will provide continued benefits to real estate developers, most notably the continuation of the Section 45L Energy Efficient Home Credit.
• Impact on your business: If enacted into law, the extension of the Section 45L credit will provide continued tax benefits for real estate developers incorporating specified energy-efficient components in their property inventory.
• Next steps: If you think you will be affected, be proactive and schedule a consultation with an Aprio advisor now to calculate the impact and create an appropriate tax strategy before the proposal is finalized.

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The full story:

On August 7, the Senate passed the Inflation Reduction Act of 2022 (IRA 2022) which would raise more than $700 billion in revenue for deficit reduction, clean energy and climate investments. The bill is scheduled for a vote in the House on August 12, 2022, and is expected to pass with a Democratic majority, and will then await President Biden’s signature to be enacted into law. The bill was passed by the Senate through the Budget Reconciliation process and contains several significant revenue-raising provisions.

While the 755-page proposal includes many components, the following are the main tax topics and the expected revenue generation for our federal government:

• 15% corporate minimum tax on domestic corporations’ financial statement (book) income.
• $80 billion to the IRS to further aid tax enforcement and compliance; this will be used to add revenue agents and update computer systems.
• Allow the Medicare program to negotiate prescription drug prices with pharmaceutical companies.
• 1% excise tax on the repurchase of corporate stock by publicly traded corporations.

Real estate takeaway

The bill, as originally drafted, contained provisions that would have directly impacted real estate developers and investors. Real estate developers receiving “promote” or carried interest payments breathed a huge sigh of relief when the carried interest provision was removed in the final bill. The bill’s original text called for a further narrowing of the preferred treatment of carried interest, which would have required real estate developers receiving “promote” payments to meet longer asset holding periods to achieve long-term capital gain treatment on those payments and would have subjected Section 1231 gains to the holding requirements already in place for carried interest. However, as a result of late negotiations aimed at garnering full support from Senate Democrats, the carried interest provision was stripped from the bill.

What was left in the bill specific to real estate investors was an extension of certain energy-efficient credits available to real estate investors and developers. IRA 2022 extends and modifies Section 45L credits for new energy-efficient homes built through December 31, 2032, providing a continued tax incentive to real estate developers of residential properties.

The original Section 45L energy efficient home improvement credit, which expired on December 31, 2021, provided a credit of up to $2,000. The IRA 2022 provisions more than double the available credit amount and extend the credit program to expire on December 31, 2032. Under the terms of the new bill, qualified contractors will be eligible for a credit up to $5,000 per house for eligible new single-family homes. For multifamily properties, the credit available is up to $5,000 per unit. For multifamily properties to qualify for the maximum $5,000 credit, they will also need to meet the new federal prevailing wage requirement for their contractors. The increased credits are effective for homes and/or units acquired after December 31, 2022. The Section 45L tax credit is available to eligible contractors in the year the certified residential units are sold or leased.

However, the expanded credit comes with some caveats. Developers must reduce the tax basis in properties by the amount of credit claimed under Section 45L. Additionally, taxpayers seeking the credit must go through a qualification process to ensure their project is eligible under the Department of Energy guidance.

The bottom line

If enacted into law, residential real estate developers will be eligible for larger tax credits on energy-efficient homes if they meet certain standards. The application process can be complex and time-consuming. Aprio’s Real Estate practice will be monitoring the progress of this bill very closely and are prepared to help you determine whether the Section 45L credit is beneficial to you and detail the tax filing requirements you need to meet to claim the credit. Reach out to Jake Patton and Jenny Deichsel for further guidance.