Topic 08 · 5 min read
Energy and Rehabilitation Incentives
Credits are worth more than deductions.
A deduction lowers the income you are taxed on. A credit lowers the tax itself, dollar for dollar. Real estate has several credits and special deductions attached to energy efficiency, historic buildings, and affordable housing.
What to know
- Credit versus deduction
- A $10,000 credit saves $10,000 of tax. A $10,000 deduction saves only your tax rate times $10,000.
- Efficient commercial buildings
- A per-square-foot deduction is available for qualifying lighting, envelope, and HVAC improvements that cut energy use.
- Solar and renewable credits
- Installing qualifying solar or other renewable systems on investment property can generate a percentage credit on the installed cost.
- Historic rehabilitation
- Certified rehabilitation of a historic structure can earn a credit spread across five years, subject to strict approval of the work.
- Affordable housing credits
- Low-income housing credits are usually accessed through funds and syndications rather than bought directly.
The tax benefit
Direct reductions of tax owed, often stacked on top of the depreciation the same improvements generate.
Worked example
Solar on a warehouse
A $120,000 solar installation on a warehouse roof produces a sizable credit against tax owed, and the system itself is also depreciated.
Watch out for
- Credits have certification and documentation requirements that must be handled before the work starts.
- Claiming a credit usually reduces the basis you can depreciate.
- Incentive programs change with legislation — verify the current year's rules.
Terms from this topic
Tax creditEnergy efficiency deductionHistoric rehabilitationBasis reduction
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