How the Inflation Reduction Act (IRA) will affect property managers

On August 16, 2022, President Biden signed the $740 billion Inflation Reduction Act (IRA) into law. Despite questions surrounding its actual impact on inflation, the law does include several provisions that address climate change.

The question property managers are asking is, “Will the IRA affect my owners and my business?” The answer is yes, and in a positive way.

The climate change and energy provisions of the IRA include tax incentives, grants, and rebates on which property managers can capitalize in 2023. They include:

• Up to $1,000 per year in tax breaks to purchase electric vehicles and alternative energy refueling systems
• Up to $14,000 in rebates to purchase heat pumps and energy efficient appliances
• Over $9,000 in savings and a 30% tax credit to install solar panels

The law also includes changes to the tax law that encourage new housing projects and renovations to existing properties, two things that could ease the current housing crisis.

With benefits like that, it’s hard not to sit up and pay attention. So, let’s dive into what exactly the IRA is and how property managers can reap the benefits of its environmental provisions.

The Inflation Reduction Act: A Brief Overview

The IRA is widely considered a pared-down version of the Build Back Better Act, which struggled and ultimately failed to pass Congress. The IRA changes the original bill’s initial scope by focusing on provisions around climate change, infrastructure, drug price reform, and tax enforcement.

With this law, the White House aims to power over 950 million solar panels, 120,000 wind turbines, and 2,300 grid-scale battery plants across the nation. The White House states that these new provisions will save every American family an average of $500 per year on their energy costs.

Specifically for property managers, investors, and homeowners, the IRA helps cut tax bills by incentivizing energy-efficient upgrades like water heaters, HVAC systems, and EV recharging equipment. Let’s break down the different ways you can take advantage of these incentives today.

Tax Certainty

The IRA provides businesses certainty by extending credits at their full value for at least 10 years, allowing businesses, homeowners, and property managers to plan projects for the long term.

HOMES Rebate

Higher fuel prices and utility costs are negatively impacting 25% of all U.S. households. The IRA incentivizes upgrades to reduce utility bills and minimize energy waste through the HOMES rebate, a new and improved $4.3 billion rebate system. Owners who perform whole-house, energy-saving retrofits are eligible for credits tied to the level of efficiency their home achieves. For example, a home that achieves 35% efficiency is eligible for a $4,000 credit.

Expect Appropriations Aimed at Reducing Household Energy Costs

The act appropriates $1 billion to help address high energy bills and reduce carbon emissions. In fact, developers can receive up to $5,000 per home that meets the Zero Energy Ready Home (ZERH) qualifications. 

Solar Panel and Clean Energy Credit

What used to be called the Residential Energy Efficient Property Credit, covered up to 26% of the cost to install solar, wind, geothermal, or biomass electricity generation systems. This was set to expire in 2024. Section 13102 of the IRA extends the commercial tax credit for solar panels to 2032.

For qualifying property managers, the IRA will provide up to 30% of the panel cost for your business or real estate property. You will get an additional 10% credit if the panel is installed in a low-income community.

The solar panels must be new and comply with the IRA’s wage and apprenticeship rules listed below according to energy.gov:

• Your solar PV system was (or will be) installed between January 1, 2017 and December 31, 2034.
• The solar PV system is located at a residence of yours in the United States.
• You purchased an interest in an off-site community solar project, if the electricity generated is credited against, and does not exceed, your home’s electricity consumption. Notes: A private letter ruling may not be relied on as precedent by other taxpayers; you would not qualify if you only purchase the electricity from a community solar project.
• You own the solar PV system (i.e., you purchased it with cash or through financing but you are neither leasing the system nor paying a solar company to purchase the electricity generated by the system).
• The solar PV system is new or being used for the first time. The credit can only be claimed on the “original installation” of the solar equipment.

Infrastructure for Transportation Equity

The IRA allocated $1.89 billion for states and local governments to increase access to public transportation in low-income neighborhoods. Property managers, homeowners, and landlords can receive up to 30% of the cost of alternative fuel vehicle refueling systems, up to $1,000 per property. For most, this means a rebate applies to bidirectional charging equipment, which can both charge EV vehicles but also discharge from the battery back to the electric grid.

However, properties that qualify to be an alternative fuel vehicle refueling property, the property must meet the following census tract requirements:

• A population census tract where poverty is at least 20%
• Or a census tract where median family income is less than 80% of the state family income level

Pro tip: Use this mapping tool to identify which tracts qualify.

Section 13404 also provides credit for EV charging stations in low-income and rural areas. An additional $1.26 billion will be invested in rewarding communities that help prevent displacement and community land trusts.

Are There Credit and Rebate Caps?

There’s are limits to the amounts that homeowners, property managers, and investors can receive from the IRA.

For example, each qualifying home cannot receive more than $14,000 in total rebates. And for families with annual incomes between 80% to 150% of the area’s median income, rebates can’t exceed 50% of the electrification project. How that will play out for rental owners, remains to be seen.

Generally, utility rebates are taxable income, but you will not need to pay income tax for energy conservation measures. However, you will have to subtract the rebate amount from the purchase price before calculating tax deductions or credits.

The tax credits get a little bit more complicated for residential and commercial properties, so we recommend consulting a tax professional about how utility and rebates interact with your credits.

Key Takeaways

As a result of the new tax incentives, property managers across the country will be able to save money, while at the same time contributing to a more environmentally-conscious future.

The success of these initiatives will depend on its implementation and education for property managers across the country. To get a full rundown of all the benefits of the IRA, consult a licensed tax professional and use this fact sheet to start taking advantage of the new bill today.