On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA). As the name implies, the goal is to help reduce inflation to rates not seen in decades. However, what do homeowners, prospective buyers, and the real estate industry stand to gain from implementing the Inflation Reduction Act?
Inflation Reduction Act
First launched in September 2021 as the Build Back Better Act, the IRA sought to significantly improve the nation’s social safety net. This version of the law didn’t emerge until the summer of 2022, after months of congressional maneuvering. It was initially approved by the Senate on August 7, and then by the House on August 12.
The bill’s name accurately describes its goals:
- Lowering inflation and,
- Lowering the national debt.
While that is a significant benefit, the Act does more. The new law reduces the cost of prescription pharmaceuticals while simultaneously increasing taxes on corporations and making the most significant investment in U.S. history to battle climate change.
What Does the Act Mean for the Real Estate Industry?
On the surface, no one in the real estate market may profit from the Inflation Reduction Act. However, there are reducing housing-related expenditures, although they are not equally distributed. Homeowners and investors in existing properties stand to gain significantly, though.
This is because many of the IRA’s tax benefits are designed specifically for those who already own a home or other property. The measure takes a “carrot-and-stick” strategy by, among other things:
- Increasing refunds for energy-saving projects
- Expanding subsidies to state and local governments as well as,
- Increasing tax credits for the owners of commercial buildings that are energy efficient.
The government’s plan to enhance our use of renewable energy is to lower the barriers to entry for green investment projects of all sizes. Here are some of the highlights of the Act that benefit some players in the real estate industry:
Energy Efficient Home Improvement Credit
The Nonbusiness Energy Property Credit, which some homeowners may have taken advantage of, was phased out at the end of 2021. Section 13301 of the Act revives and significantly upgrades the program, extends it through 2032, and rebrands it as the Energy Efficient Home Improvement Credit.
As it stood before, homeowners could only claim a maximum $500 tax credit throughout their lives. An annual credit of up to $1,200 is available, and the lifetime maximum has been removed, thanks to the IRA. If homeowners make energy-saving upgrades across several years, they can claim the credit for each year they make the changes.
The credit will equal 30% of the expenses of all qualified home renovations that add the most value in the year beginning in 2023. This increase is substantial compared to the previous law’s 10% cap. There will also be revisions to the regulations governing energy efficiency.
Residential Clean Energy Credit
As it was formerly known, the Residential Energy Efficient Property Credit is being renamed and expanded upon for ten years. Originally due to expire in 2024, it has since been extended to 2034, thanks to Section 13302 of the IRA.
The Act does more than rebrand and extends the credit by increasing its value. Credits used to be worth 26% of qualified system installation costs. In 2023, it would have dropped to 23% until it expires in 2024.
It is 30% under the Act. After 2034, it will drop to 22% and eventually expire. The IRA modifies its scope so that water heaters and biomass furnaces are no longer included. Instead, it includes battery storage systems with at least three-kilowatt hours.
High-Efficiency Electric Home Rebate Program
Section 50122 of the IRA established a rebate program to encourage green living among American households. Through this initiative, the IRA provides financial incentives to low- and middle-income families who renovate their homes with energy-saving appliances and practices.
In contrast to a tax credit, which just lowers a homeowner’s tax burden, this initiative will result in monetary benefits for those who participate.
If you are looking at buying or selling a house in Arizona, you should have AZ Flat Fee realtors handle your transaction. Our real estate professionals will handle the process from listing to closing and help you take advantage of the Act, all for a fixed price of $3500.
Does the Act Benefit Home Buyers?
Considering the several benefits available to new and existing homeowners, first-time buyers may be sorely disappointed. A lot of potential homebuyers hoped the Act would lower housing costs. The Act makes very little to no difference to the escalating housing costs. This is why it was vehemently opposed by the National Association of Home Builders.
Instead, it makes it easier to save money on energy renovations to your buildings and make more cost-effective purchases of energy-saving appliances. This means that homebuyers looking to benefit from the Act can only do so by implementing environmentally friendly renovations.
While home buyers can take advantage of some of the new tax credits and incentives, they may need to wait for a while before other measures in the Act come into full effect.
How Does the Act Affect Real Estate Investors?
As a real estate investor, you also enjoy some benefits of the Act. The IRA revised Section 179D of the tax code, which addresses real estate investors.
Buy a new energy-efficient structure or perform a significant energy retrofit on an existing facility. You can write off a sizable portion of the asset’s cost in the first year rather than spreading it out over several years of “depreciation expense.”
Under Section 13102 of the IRA, the commercial tax credit for solar panels (under Section 48 of the IRC) has been extended to 2034, with a phase-out commencing in 2032. You can now deduct 30% of the total cost of the panels from real estate activity taxes.
With the passing of the Inflation Reduction Act into law, you want to ensure that you take advantage of its several tax benefits. While it doesn’t drop house prices, it still holds a lot of promise for homeowners, home buyers, and real estate investors.