Seven Powerful Benefits of 179D & 45L Tax Incentives for Real Estate Projects

Are you leaving money on the table with your real estate projects? Many real estate developers and property owners are missing out on significant financial savings by not leveraging energy-efficient tax incentives. 

If you’re looking to boost your project's profitability while enhancing its environmental impact, Sections 179D and 45L are powerful tools you need to know about. These incentives can dramatically reduce the costs associated with energy-efficient upgrades and new construction.

In this post, we'll break down seven key benefits of these tax incentives and show you how to make the most of them. Plus, we invite you to join our upcoming webinar on August 27th, hosted by TaxTaker and Jordan & Skala Engineers, where we’ll dive deeper into these opportunities and share strategies to maximize your savings.

1. Massive Financial Savings

Section 179D: This incentive provides tax deductions of up to $5.00 per square foot for energy-efficient improvements in commercial buildings. Eligible improvements include HVAC systems, interior lighting, and building envelope enhancements. For example, a 100,000 square foot building could qualify for up to $500,000 in deductions, significantly reducing overall tax liabilities. This deduction allows property owners to reinvest savings into further building improvements, operations, or other critical areas of their business.

Section 45L: For residential projects, this credit offers up to $5,000 per unit for homes meeting specific energy-saving standards. The potential savings are substantial, especially for large residential projects. Imagine a 100-unit multifamily project receiving up to $500,000 in tax credits. These credits can help offset the higher initial costs of incorporating advanced energy-efficient technologies and materials, making green building projects more financially feasible.

2. Boost Property Value

Energy-efficient improvements not only reduce operating costs but also enhance the market value of properties.

Section 179D: Commercial buildings with energy-efficient upgrades are more attractive to tenants and buyers, leading to higher occupancy rates and increased property value. Energy-efficient buildings typically have lower operating costs, which can result in higher net operating income (NOI) and increased property valuations. Moreover, tenants are increasingly seeking sustainable and energy-efficient spaces, which can reduce vacancy rates and command higher rents.

Section 45L: Energy-efficient homes are in high demand, appealing to environmentally conscious buyers and renters. Homes with certifications like ENERGY STAR or Zero Energy Ready Home are especially marketable, offering long-term energy savings and increased resale value. These homes not only provide lower utility bills for occupants but also contribute to a healthier living environment, which can be a significant selling point.

3. Compliance with Regulations

Both incentives help ensure compliance with local and federal energy efficiency regulations, avoiding potential fines and penalties.

Section 179D: Many cities and states are implementing stricter energy efficiency laws. Investing in energy-efficient systems now can prevent costly upgrades in the future to meet these regulations. By staying ahead of regulatory requirements, property owners can avoid potential fines, reduce compliance costs, and position their properties as leaders in sustainability.

Section 45L: Builders who adhere to energy efficiency standards like ENERGY STAR or DOE Zero Energy Ready Home certifications not only qualify for tax credits but also ensure their projects meet current and future regulatory requirements. Compliance with these standards can simplify the approval process for new projects and renovations, as well as provide assurance to buyers and investors that the properties are built to the highest energy efficiency standards.

Learn more about these compliance benefits and how they can protect your investments by attending our webinar.

4. Positive Environmental Impact

Energy-efficient buildings contribute to environmental sustainability by reducing greenhouse gas emissions and conserving resources.

Section 179D: By encouraging energy-efficient upgrades in commercial properties, this incentive helps reduce the carbon footprint of large buildings, promoting a greener environment. Energy-efficient buildings typically consume less energy, resulting in lower greenhouse gas emissions and reduced reliance on non-renewable energy sources. This can significantly contribute to corporate sustainability goals and improve the overall environmental impact of commercial properties.

Section 45L: Energy-efficient residential buildings use less energy for heating, cooling, and lighting, significantly lowering their environmental impact and promoting sustainable living practices. These buildings often incorporate renewable energy sources, high-performance insulation, and advanced HVAC systems, further enhancing their environmental benefits. Promoting energy efficiency in residential construction can also help reduce the overall demand on the energy grid and decrease the community's carbon footprint.

5. Support for Advanced Technologies

Both incentives encourage the adoption of advanced energy-efficient technologies, driving innovation in building design and construction.

Section 179D: The deduction covers a wide range of energy-efficient systems and components, pushing businesses to invest in the latest technologies that improve building performance. This includes advanced HVAC systems, high-efficiency lighting, and building envelope improvements that significantly enhance a building's energy performance. Investing in these technologies can also lead to long-term operational savings and improved building performance.

Section 45L: The credit supports the use of cutting-edge building techniques and materials that meet rigorous energy efficiency standards, fostering innovation in the residential construction industry. Builders are incentivized to incorporate advanced technologies such as high-performance windows, state-of-the-art insulation, and renewable energy systems. These innovations not only reduce energy consumption but also improve the comfort and health of building occupants.

6. Financial Incentives for Builders and Developers

Both Section 179D and Section 45L provide direct financial benefits to those investing in energy-efficient building practices.

Section 179D: Building owners, lessees, and designers can all benefit from the deductions, making energy-efficient upgrades more financially attractive. For designers working on government buildings, there are additional opportunities to benefit financially from these incentives. This creates a compelling financial case for adopting energy-efficient practices and technologies in commercial building projects.

Section 45L: Residential developers and builders receive tax credits that help offset the costs of implementing advanced energy-saving measures, making green building projects more feasible and profitable. These credits can significantly improve the financial viability of projects, allowing developers to offer competitive pricing while maintaining high standards of energy efficiency.

7. Recent Enhancements under the Inflation Reduction Act

Both programs have been significantly enhanced, providing even greater benefits.

Section 179D: The deduction amount has increased from $1.80 to $5.00 per square foot, with additional bonuses for projects meeting prevailing wage and apprenticeship requirements. This increase makes the incentive even more attractive and can substantially reduce the cost of energy-efficient improvements. The additional bonuses further incentivize projects that support fair labor practices and workforce development.

Section 45L: The credit amounts have increased to up to $5,000 per unit, with expanded eligibility to include mid and high-rise residential buildings, aligning with updated DOE’s Energy Star and Zero Energy Ready Homes programs. These enhancements make it easier for more projects to qualify for the credit, providing greater financial support for energy-efficient residential construction.