Do you know much about President Biden's Inflation Reduction Act? If not, you're not alone.
This bill, signed into law in August 2022, is new and pushes many real estate investors into murky waters.
The IRS hasn't provided clear guidance on the Inflation Reduction Act, and many wonder what the new law means for the real estate industry.
We'll show you the most relevant portions of the Act and how it might affect you as a real estate investor. This discussion won't be a comprehensive guide, but it will demystify some of the sections of the Act that influence your bottom line.
The Inflation Reduction Act (IRA) was passed in the Senate and House of Representatives; President Bident signed the legislation into law on August 16, 2022. There is good news for real estate investors in the bill.
In most cases, the IRA should not raise your taxes; instead, to combat inflation, the IRA created the following ways to increase tax revenue:
The increase in enforcement might affect you as a real estate investor. An increase in enforcement probably means more audits due to more IRS agents, but you can protect yourself with good bookkeeping practices.
It's in the name–the bill aims to reduce inflation. With a reduction in inflation, the Federal Reserve can start easing back the interest rate hikes it's been implementing. This change takes time, but the end is–ostensibly–near, and Chairman Powell might be willing to ease up on the aggressive measure taken to date.
That's good news for a real estate investor because lower interest rates should coincide with favorable mortgage rates; reasonable mortgage rates should result in more property deals.
One of the most relevant portions of the bill for real estate investors is the $369 billion earmarked for green energy and energy security.
The IRA provides $369 billion to tackle the climate crisis in the United States. The primary provision is tax incentives and credits for homeowners, businesses, and investors.
The cost of energy increased to historic highs in 2022. As a real estate investor, you likely incurred increased utility bills in your properties, and that added cost significantly impacts your cash flow.
An investment in green energy ideally will lower the cost of energy across all sectors, including for you.
Another provision in the bill may help real investors mitigate the energy cost while also receiving tax credits by going green.
The relevant section for the solar panel tax credit is §13102 of the Inflation Reduction Act. This section extends the commercial tax credit for solar panels to 2034.
Starting on January 1, 2022, your max tax deduction will be 30% of the solar panel's cost to your real estate property. The solar panel credit no longer has to go to your primary residence.
Here is an example illustrating how that credit works for a real estate investor.
Suppose you have a single property that you own and lease to tenants. You invest in a solar panel system that costs about $13,000. If you meet the requirements and earn the tax credit, the IRS will pay for 30% of the system, or $3,900.
That's a good incentive, but additional benefits have to do with depreciation. You already have the 30% tax break, but you also have the provisions of 26 U.S. Code § 168, which gives energy property a 5-year life. That means you can depreciate the value of the panel over five years.
That matters for real estate investors because you get multiple benefits from installing solar panels:
The federal government has stipulations for these credits and benefits:
These incentives apply to your real estate business' commercial vehicles. The IRA expands the 30d clean vehicle tax incentive through 2032. The incentive includes:
The Inflation Reduction Act is probably a good thing for real estate investors, but we need further guidance from the IRS to understand its full impact.
While there may be minor changes to the law and enforcement, a real estate investor should enjoy the benefits, including:
Do you want to learn more about how to secure your financial freedom? Take our FREE Tax Quiz to learn how to handle the new law and your potential taxes.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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