Tax Incentives for Multifamily Investors
Kyle Sund, EA Tax Credits & Incentives Senior Manager, Moss AdamsJanuary 4, 2023
• Tax deferral strategy that frontloads depreciation deductions into the early years of real estate ownership • Identifies, separates, and classifies real and personal property assets or buildings and equipment components into shorter recovery periods
2 • Significantly shorter tax lives—5-, 7-, and 15-years—rather than the standard 27.5or 39-year depreciation periods
27.5-year property: Residential rental property, such as multifamily properties and senior housing (independent living, assisted living, memory care)
39-year property: Nonresidential real property—all other commercial property • Increase current and future deductions, as well as catch-up “missed” deductions for past depreciation • Reduces current tax liability—time value of money Identify Separate Classify
Cost Segregation
•
•
• New construction projects • Remodels, expansions • Tenant improvements • Property acquisitions • Allocations of purchase price • Like-kind exchanges (Sec. 1031) • “Look Back” studies (Form 3115) • Catch-up depreciation missed on past tax returns without amending returns • Applicable to any of the above project types • Bonus Depreciation • 100% for assets placed in-service 9/28/2017 to 12/31/2022 • Phases down by 20% per year beginning in 2023 Cost Segregation Studies 3
• Has taxable income and can utilize accelerated depreciation • Owns significant building and/or land improvements—can go as far back as necessary via Form 3115 • Expanding and/or remodeling facilities • $1 million or greater depreciable basis for a purchase or new construction • $250,000 or greater of interior improvements • Will hold the property for more than 3-5 years Taxpayer Criteria 4
Reclassifications 5 30–60% 20–50% 25–45% 20–40% 20–35% 20–30% 10–30% 10–20% 0% 10% 20% 30% 40% 50% 60% 70% Heavy manufacturing Self-storage facility, medical office, hospital Auto dealership, winery Grocery store, restaurant, light manufacturing, golf and resort Bank, assisted living facility, garden-style apartments Office
center,
club
warehouse facility, high-rise apartments PERCENTAGE
RECLASSED
Typical
building Shopping
hotel, fitness health
Distribution or
OF
PROPERTY
Bonus Depreciation
6 *If acquired and placed in service after September 27, 2017
Inflation Reduction Act Section 179D: Energy Efficient Commercial Building Tax Deduction Section 45L: New Energy Efficient Homes Tax Credit 7
• Pre-IRA deduction: Energy efficient commercial building deduction of $1.80 per square foot (adjusted for inflation: $1.82/SF in 2021, $1.88/SF in 2022) • Available for newly constructed buildings or building improvements placed in-service after January 1, 2006 • Energy performance must be modeled by a qualified third party and certified by a contractor or professional engineer licensed in the state where the building is located • Pre-IRA, Section 179D deduction can be claimed by: Section 179D Background (Pre-Inflation Reduction Act) • Created in 2006 • Made permanent in 2020 8 Owners and tenants of commercial buildings who’ve built or installed improvements Owners of fourstory or greater residential buildings who’ve built or installed the improvements Designers of government-owned, energy-efficient buildings (architects, engineers, or contractors)
Inflation Reduction Act Modifies Section 179D
• Increase in potential deductions from $1.88 per square foot to $5.00 per square foot
• Non-profits can now allocate deductions to the designer
• Bonus deduction tied to prevailing wage and apprenticeship requirements
9
Section 45L: Inflation Reduction Act Extension of Existing Energy Efficient Homes Credit 10 • Available for single-family home builders and multifamily developers who have basis in the construction of new (or renovated) dwelling units $2,000/dwelling unit tax credit that is transferred (sold/leased/rented) during your tax year $1,000 or $2,000/unit tax credit for manufactured home developers Units meet or exceed a 50% reduction in energy consumption from baseline unit using 2006 International Energy Conservation Code (IECC) standard • Eligible dwelling unit types: Single-family homes + townhomes Multifamily developments (3-stories or less) Senior living facilities (not memory care units) House boats Manufactured and mobile homes • Amend tax returns to claim credits in prior open tax years Existing credit was extended retroactively from Jan 1, 2022 to Dec 31, 2022
• 2023 energy certification changes: Department of Energy’s (DOE) ENERGY STAR Single-family Homes National Program, DOE’s ENERGY STAR Manufactured Homes, DOE’s ENERGY STAR Multifamily New Construction National Program, Optional DOE’s Zero Energy Ready Homes (ZERH) • Subject to prevailing wage (PW) requirements – in some cases, HUD and LIHTC projects already require prevailing wages • Multifamily properties 4-stories or greater are now eligible for 45L – as well as 179D – beginning in 2023 Section 45L: Inflation Reduction Act Credit Amounts from 2023 to 2032 11 Taxpayer Credit through Dec. 31, 2022 Credit 2023 - 2032 ENERGY STAR Credit 2023 - 2032 w/ ZERH Credit 2023 - 2032 W/ PW Credit 2023 - 2032 w/ ZERH + PW Single-family Home Builder $2,000 $2,500 $5,000 PW NA PW NA Multifamily Developer $2,000 $500 $1,000 $2,500 $5,000 Manufactured Home Developer $1,000 or $2,000 $2,500 $5,000 PW NA PW NA
Reduction Act: “Bonus” Deductions/Credits
Wage
Apprenticeship Requirements 12 If construction begins prior to January 30, 2023, the project is deemed to meet the prevailing wage and apprenticeship requirements for the increased “bonus” amounts for 179D and 45L o Physical work test and 5% safe harbor Prevailing Wage Requirement: o Must be paid to laborers and mechanics employed by the taxpayer, a contractor, or a subcontractor to construct the property o Taxpayer is required to maintain sufficient records to document work performed and wages paid Apprenticeship Requirement: o Total labor hours of the construction of the facility is performed by qualified apprentices must exceed applicable percentages o Apprenticeship labor hour percentages by date construction begins: • Before January 1, 2023: 10% • After December 31, 2022 and before January 1, 2024: 12.5% • After December 31, 2023: 15% o Not applicable to 45L credit
Inflation
Prevailing
&