Inflation Reduction Act – Key Takeaways
As one of the biggest climate investments ever made by the federal government, the Inflation Reduction Act commits to fund $369 billion in climate pollution reduction and clean energy security. It paves the way for most Americans to access sustainable energy resources and energy-efficient technologies for the next decade. For the real estate industry, this will prove to have the largest impact, given that the building sector accounts for 76% of electricity use and 40% of greenhouse gas emissions in the United States. The Inflation Reduction Act has significant potential to accelerate returns in energy efficiency upgrades and renewable energy investments – leading to faster overall decarbonization.
Here are 4 key takeaways that could assist real estate leaders in reviewing and considering investments in capital improvement projects:
Incentives and Rebates for Energy Efficiency Upgrades:
Billions of dollars worth of direct rebates will be available for building owners to purchase energy efficient products, such as electric heat pumps, electric water heaters, and electric cooktops.
The act also provides significant tax benefits to both energy efficient commercial and large multifamily residential buildings.
For commercial buildings, tax deduction incentives have expanded from 2 years to 10 years. Additionally, they have expanded from $1.80 per square foot to a sliding scale of $2.50- $5.00 per square foot – which also includes a pathway for existing building retrofits to access the deduction. Separately, REITs are also now eligible for deductions, and provisions to allocate deductions for public projects have been implemented.
For large multifamily residential buildings, credits of $2,500 per unit for meeting ENERGY STAR or $5,000 per unit for meeting DOE zero-energy ready (not limited to buildings with 3 stories or less). Additionally, building developers can take both 45L and LIHTC for affordable housing projects.
Expanded Tax Credits for Renewable Energy Installation:
The Act includes a large mix of tax credits that are intended to lower the installation costs of renewable energy generators and electric vehicle fleet purchases. Many renewable energy technologies are covered in this Act, including solar panels, wind turbines, and batteries. The 30% tax break for solar panel installations will extend for another decade.
Direct Funds for a Clean Electricity Future:
Another large portion of the Act includes access to clean electricity resources. A $15 billion fund will be established to distribute incentives to projects that bring clean energy to low-income and disadvantaged communities. Another $6 billion will reward projects that monitor air quality and clean up air pollution for their respective communities.
On the utility provider side of the equation, the Act incentivizes providers who seek clean energy transitions. $10 billion in direct payments will be used to retire rural co-op coal-fired power plants and the costs of clean energy transition.
Grants for Jurisdictions to Adopt Stricter Energy Conservation Codes:
$330 million in grants will be provided to state and local governments to adopt energy codes meeting or exceeding the 2021 International Energy Conservation Code and/or ASHRAE 90.1-2019 Energy Standard for Buildings Except Low-Rise Residential Building. The Act also provides an additional $670 million to adopt and implement zero-energy stretch codes.
If the policies work as designed, the Act will push the real estate industry away from reliance on fossil fuels and reduce harmful pollution. With the expanded credits and incentives, building managers can leverage their resources to prioritize projects that decarbonize their buildings and meet sustainability goals across their respective organizations.
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