Mark Johnson Published in Real Estate Finance

Mark Johnson’s article [“Construction Can Earn Tax Benefits”] in the October issue of Real Estate Finance describes the various incentives and provisions of the Energy Policy Act of 2005 (EPAct), which aims to reduce dependence upon foreign oil through conservation.

The EPAct encourages the construction and use of energy-efficient buildings by providing tax credits for certified energy-efficient residential buildings, and tax deductions for certified commercial buildings. Mark provides specific requirements for eligibility to receive tax credits for qualified residential dwellings and manufactured homes, which are subject IRS Notice 2006-27, which highlights credit available under EPAct for residential construction. He speaks of additional credits and limits such as 10 percent credit of the cost of installing energy-efficient building equipment for qualifying components installed within the primary residence between December 31, 2005, and January 1, 2008, which may be combined with other tax incentives to result in a larger award. A 100 percent tax credit is available for the installation of “qualified energy property” such as fans (up to $50), oil or natural gas boilers (up to $150), and central heating or air-conditioning systems (up to $300). Also, taxpayers may receive a 30% credit toward the installation of solar hot water heaters (up to $2,000) and 30% credit toward the installation of photovoltaic (solar-electric) systems (up to $2,000).

Taxpayers who implement energy-efficient improvements to commercial buildings are eligible to receive EPAct’s tax incentives in the form of tax deductions. Improvements must be made pursuant to a plan certified by the IRS before the tax deduction is taken. Eligible buildings that decrease their annual use of energy by 50% relative to the American Society of Heating, Refrigerating, and Air Conditioning Engineers’ 2001 Standard are eligible for a tax deduction equivalent to the cost of the installation of energy-efficient property, up to $1.80/square foot In addition, building sub-systems may be eligible for a partial deduction of up to $.60/square foot. These incentives apply to buildings constructed after December 31, 2005, and prior to January 1, 2008, although this date may be extended through 2009 or 2010. If the plan for energy-savings improvements is not fully implemented, the deduction is subject to recapture.

Mark cautions that in the case of privately owned buildings, the incentives are generally awarded only to the original owner or renovator. In the case of publicly owned buildings, the incentives are normally available only to the entity responsible for the renovation.