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December 18, 2023 | read

179D: Energy Efficient Upgrades for Tax Deductions

Brandon Hall

Anyone who owns property wants to shell out as little to the IRS as possible come tax time. Do you also want to go a little green? Maybe reduce your month to month energy costs too (always, right)? The 179D tax deduction was made for you! Here, the real estate tax experts at The Real Estate CPA explain 179D, how to qualify and the savings you can expect.

The 179D tax deduction, which has been in effect since January 1, 2006, was established through the enactment of the 2005 Energy Policy Act (EPAct) and has been renewed continuously over the last decade. The deduction encourages owners and lessees of new and renovated buildings to construct, operate and maintain their buildings in such a way which reduces energy consumption and lessens carbon footprint, while still safeguarding the occupants’ comfort and ease of use. Cash-saving, green, and comfortable is the idea here. What’s not to like?

Though the 179D tax deduction recently expired on the 31st of December 2016, experts are expecting a renewal. And until then, there are many who are still eligible to take advantage of the savings it can provide.

2020 Edit: Section 179D has been renewed and is in effect until December 31, 2020. The 179D deduction has been in place since January 1, 2006.

Who Can Qualify for the 179D Tax Deduction?

You need four things to qualify for the deduction: a certain type of building, type of system installed, particular date of service and specific cost reduction.

If you own or lease a commercial property of any size, or residential property which is over four stories tall, you can qualify for the 179D tax deduction—just make sure the buildings were either constructed or redone and then placed in service between December 31, 2005 and January 1, 2017. An energy efficient upgrade or new installation of any of the following systems could meet the requirements: The building’s interior lighting systems, the property’s HVAC system, the building’s hot water systems and the property’s building envelope. Revamp them all for maximum tax deductions.

To qualify for the 179D tax deduction, the percentage of cost reduction must be first calculated using a Department of Energy certified software. To ensure the accuracy of the measurement, a field inspection in accordance with National Renewable Energy Laboratory (NREL) guidelines must be performed after the deduction-eligible property has been placed into service, and the inspector must be a qualified engineer or contractor in the jurisdiction of the eligible building. Finally, if allowed the deductions, the taxpayer must keep records of the certifications establishing their right to the value of deductions claimed.

How much can I deduct?

The deduction amount, which is claimed for the taxable year in which the property is officially placed in service, can vary based on both the size of the building, and the level of efficiency of the systems installed. Earning the maximum deduction of $1.80/sq. ft. requires the newly constructed or renovated buildings to meet or exceed a 50% energy cost reduction (as compared to reference ASHRAE 90.1-2001 baseline building standards).

For those who do not meet that standard, with lower percentage cost reductions, a lesser deduction of $0.60 per square foot can be claimed.  For partial deductions, there must be a minimum 15% savings for heating and cooling systems, a 25% savings for lighting systems, and a 10% savings for building envelopes: these updates qualify for the .60/sq. ft. savings.

Let’s say Joe owns an office building that was built in 2009. Joe, like anyone else, wants to part with as few of his hard-earned bucks as possible. He’s also a bit of a weekend environmental warrior. He hears about the 179D tax deduction in 2014 (if only he’d come to The Real Estate CPA, he would have heard about it sooner…but I digress), and by October 2015, has had his office building’s interior lighting, HVAC, and hot water systems renovated to meet the ASHRAE 90.1-2001 standards (the standards that apply to any building that gets this done before Jan. 1st 2016—ASHRAE 90.1-2007 standards are for buildings after Dec. 31st 2015). He can now file an amended 2015 tax return, including the 179D tax deduction, and presto! Money back from the IRS, cheaper month-to-month energy costs from his energy efficient upgrades, and the feeling of saving the planet one HVAC, hot water, and lighting system at a time.

At this point, you should be chomping at the bit to take advantage of the 179D tax deduction. Don’t, however, fight for this deduction alone—the tax experts at The Real Estate CPA are here to guide you through the process. For more information, or to speak with one of our dedicated CPA’s, schedule your consultation today.