Anyone considering investing in real estate knows it can be expensive. High costs can be incurred when purchasing, newly constructing or renovating a property. For most, these costs are carefully considered before investing in a new or existing property. But are you also carefully considering the tax incentives available for real estate projects? If you answer yes to any of the below questions, you are likely eligible to receive one or more of these real estate tax savings.
Have you or are you planning to:
- Purchase a residential rental or commercial property?
- Construct a new residential or commercial property?
- Renovate a commercial, high-rise residential, or residential rental property?
Cost segregation has been a valuable way for taxpayers to maximize depreciation for over 50 years. Typically, a taxpayer depreciates residential rental property over 27.5 years and commercial property over 39 years. Cost segregation allows you to segregate the components of the property and reclassify them into different asset categories. These asset categories often have shorter depreciation lifespans, allowing the taxpayer to accelerate the depreciation timeline. The benefit from a cost segregation will vary based on the property basis and equipment/materials installed.
Case Study: A taxpayer constructed a new retail shopping center for $15,000,000. After a cost segregation study was performed, the additional depreciation deduction for the first tax year was approximately $7,000,000.
Section 179D – Energy Efficient Commercial Buildings Deduction:
Section 179D was made permanent at the end of 2020 and is an incentive available to taxpayers who install HVAC and hot water, lighting, and building envelope (roof, wall, windows, etc.) equipment into a commercial or high-rise residential property. For equipment placed into service in 2022 or earlier, you can receive up to $1.88 per square foot of your building. For projects planned to complete in 2023 and the future, the rate was increased to $5 per square foot. The depreciation of the building is then accelerated by the value identified from the Section 179D analysis.
Case Study: A taxpayer is installing a new roof and HVAC unit on their 105,000-square-foot manufacturing facility, scheduled to complete in 2023. After a Section 179D study is performed, the taxpayer can receive up to $525,000 in an accelerated depreciation deduction.
45L – Energy Efficient Home Tax Credit
45L was first introduced in 2005 and is currently available through the end of 2032. 45L is a tax credit available to taxpayers who construct energy-efficient residential dwellings. For construction projects completed in 2022 or earlier, you can receive a credit of up to $2,000 per residential unit. For projects planned to complete in 2023 and the future, the credit was increased up to $5,000 per residential unit.
Case Study: A taxpayer is developing a 20-home residential neighborhood, scheduled to complete in 2023. After a 45L study is performed, the taxpayer can receive up to $100,000 in tax credits.
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