Section 45L Tax Credits

I ask this because many of the people, who should know about these incentives and should be taking advantage of them, are not. They aren’t even aware of them let alone taking them, and that is needlessly leaving a lot of money on the table. If you are, great. If you are not, you should be. And if you think that because this is what you do that “your people are handling it”, a common answer. Think again. Many times, they’re not.

Multifamily properties owners can upgrade their properties to be more energy efficient while leveraging specific energy efficiency tax credits to lessen the financial impact of renovating their property. In fact, many of these upgrades contribute to the energy efficiency of the unit, whether or not that was the intended purpose. Added to that are specific changes to the capitalization rules that further provide offsets to the cost of renovations. And energy efficient apartments can justify increased rental rates and property values. Added together they often times more than pay for themselves. One should never, ever, look at the ROI of an upgrade using the simple payback method. Doing so totally ignore where your ROI is coming from and results in you walking away from a boat load of money that’s yours for the taking.

Whenever I mention this to property managers or owners I might hear about the cost segregation studies they do, or did, but I hear nothing regarding the energy efficiency tax credits or about taking advantage of the new capitalization rules. While cost segregation studies help identify the costs of your asset classes and organize them so that you can accelerate some of your deductions, and can assist in the recapture when you sell, they don't lend themselves well to the new capitalization rules that allows you to deduct the value of certain assets. Deduction that also reduce the amounts you need to recapture at the time of sale, which results in a reduction in your capital gains tax.

Imagine a scenario where you are spending $15 million on a 250-unit apartment complex, then spending another $4 million on renovations, then learning you can have a $2.1 million in ordinary deductions and another $2,000 per unit tax credits totaling $500,000? Wouldn’t that be a nice surprise? Now that $4 million renovation expense has just provide you with another $2.1 million in additional deductions and $500,000 in tax credits to help offset your tax liability. And this does not take into consideration the repercussions of what such a deduction might have on your income, operational cash flow, or tax liabilities for both income and capital gains. Maybe you just created a net operating loss and are able to get a refund on past taxes paid, or recover current estimated tax payments, or both, and maybe still have a carry-forward after looking back? Maybe you also lowered the basis of your recapture by $1 million? That’s a $200,000 capital gain tax savings. Now how’s the ROI looking on that $4 million renovation?

If you knew of these incentives going in, would it change what you renovated or how deep of a renovation to make?

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