The $740 billion Act includes provisions that may affect the rental housing industry.
On Aug. 16, President Biden signed the Inflation Reduction Act (IRA) of 2022, ending months of negotiations on a bill totaling over $700 billion. In a significant win for the rental housing industry, the final bill did not change the taxation of carried interest. The carried interest provision originally proposed within the bill would have negatively impacted the multifamily industry by requiring that an asset be held for 3 years before it could qualify for carried interest treatment.
Related, the IRA includes a 15% minimum tax on corporations and a 1% excise tax on stock buybacks, both of which will take effect beginning January 2023. The bill also, unfortunately, extends current law limits on excess business losses by two years.
Additionally, the IRA includes several climate change and energy provisions that affect housing providers. These include energy efficiency tax incentives, grants to hasten state adoption of stricter building codes, support for “transportation equity” investments and targeted sustainability incentives for affordable housing providers and rebates for certain energy efficiency retrofits.
See below for more details on the IRA and how it could affect the industry.
Energy Efficient Commercial Buildings Deduction
Beginning for property placed in service in 2023, the base credit for buildings with four or more stories that exceed 25% of ASHRAE standards in effect three years before a building is placed into service would be $0.50 per square foot for energy savings. It would increase by $0.02 per square foot for every percentage point by which energy savings exceed the 25% baseline threshold, up to $1 per square foot. Bonus amounts, as described above, are available for taxpayers both prevailing wages and meeting apprenticeship requirements.
Additionally, taxpayers would be able to take a deduction for energy efficient lighting, HVAC and building envelope costs placed in service as part of a retrofit. The value of the deduction would be based on how much energy savings is achieved. A minimum 25% reduction would be required to realize a $0.50 per square foot gain in the base credit.
The base credit would be increased by $0.02 per square foot for each additional percentage point in energy savings, up to $1 per square foot. Bonus amounts, as described above, are available for taxpayers meeting paying prevailing wages and meeting applicable apprenticeship requirements. The National Apartment Association (NAA) and National Multifamily Housing Council (NMHC) have long called for retrofits with energy savings measured against an existing building’s baseline energy usage to be eligible for the credit.
Finally, the provision includes a special rule to enable REITs to take advantage of the deduction.
Regarding apprenticeship requirements for bonus amounts, projects would also have to be staffed by apprentices (10% of labor hours must be performed by apprentices for projects commencing construction in 2022, 12.5% in 2023 and 15% thereafter, with a minimum of one apprentice for each contractor or subcontractor employing at least four workers). Exemptions would be permitted if apprentices are unavailable.
New Energy Efficient Home Credit
The proposal would extend the New Energy Efficient Home Credit through 2032 (which under current law applies to buildings of three or fewer stories but after 2022 would apply to all buildings meeting the requirements of the ENERGY STAR Multifamily New Construction Program). For multifamily units acquired after 2022, a base credit of $500 is provided for units that participate in the ENERGY STAR Multifamily New Construction Program while meeting both national and regional program requirements. It is, however, unclear whether multifamily units will decide to participate in this program. A base credit of $1,000 is available to multifamily homes certified as zero energy ready under the Department of Energy Zero Energy Ready Home Program. Bonus amounts, as described above, are available for taxpayers meeting applicable prevailing wage requirements. Finally, a provision is included so that the credit may be better used in conjunction with the Low-Income Housing Tax Credit.
Building Codes
The package allocates $330 million in grants to help states adopt the most recent residential and commercial building energy codes International Energy Conservation Code ASHRAE Standard 90.1-2019 or codes achieving equal or greater energy savings. In addition, it provides state and local governments $670 million to adopt building codes that meet or exceed the zero-energy provisions in the 2021 IECC.
While NAA and NMHC support cost-effective and technologically feasible energy codes, we caution against one-size-fits-all federal policies that direct the use of specific code provisions or editions. The codes and standards specified in this program are designed to be amended and adopted by state and local jurisdictions based on their individual needs and characteristics. Federal incentives must be designed to improve code implementation and performance over a jurisdiction’s existing baseline and acknowledge the diversity of conditions that impact state and local code adoption.
Infrastructure
The package includes $1.89 billion for fiscal 2022 for states, local governments, territories or transportation authorities to increase neighborhood access and transportation equity. It also includes $1.26 billion for additional grants to communities that adopt anti-displacement policies or community land trusts.
Affordable Housing
The package includes $837.5 million for the U.S. Department of Housing and Urban Development (HUD) to provide grants or loans to affordable housing owners that implement:
Energy or water efficiency;
Indoor air quality or sustainability;
Zero-emission electricity generation or low-emission building materials or processes;
Energy storage;
Building electrification; and
Climate resilience.
New Energy Efficiency Rebates
The IRA includes $4.3 billion for states to create programs to offer Home Owner Managing Energy Savings (HOMES) Rebates. A portion of these funds will be available for owners of multifamily properties to retrofit their units or buildings. A property may be eligible for $2,000 per unit if the project achieves at least 20% modeled energy savings up to $200,000 and $4,000 per unit if the project achieves at least 35% modeled energy savings up to $400,000. For low- and moderate-income buildings, these figures jump to $4,000 and $8,000 per unit, respectively. States may instead use measured energy savings and a payment rate per kilowatt hour saved or equivalent measurement to offer $2,000 per unit for a 20% reduction in energy use or 50% of the project costs. This payment standard increases for low- and moderate-income buildings to $4,000 per unit or 80% of the project cost and would apply to any multifamily property or portfolio of properties which achieve at least 15% in energy savings.
The Act also includes $4.275 billion for states to implement a high-efficiency electric home rebate program that can be used by single-family and multifamily property owners to upgrade inefficient and non-electric water heaters, HVAC systems, appliances and clothes dryers, as well as for insulation, air sealing and installing electric load or service center panels. More guidance will be necessary from individual states and the Secretary of Energy on applicable uses for these funds and how to access them.
Extension of Excess Business Loss Limitation
The Act would extend for two years, through 2028, a provision limiting excess business losses that was otherwise set to expire at the end of 2026. Under current law, a non-corporate taxpayer is considered to have an excess business loss if their total business deductions exceed business income plus $270,000 for single filers and $540,000 for joint filers (adjusted annually for inflation). Excess business losses exceeding the limit and subject to disallowance in the current tax year are treated as a net operating loss carryforward in the succeeding year.