Under the 2022 Inflation Reduction Act, property owners can now engage in a credit transfer provision that allows Real Estate Investment Trusts (REITs) to transfer the Investment Tax Credit to unrelated parties for cash without including the proceeds in their gross income.
The IRA has sparked a fundamental shift in modifying asset ownership strategy, with a newfound focus on distinguishing between real and personal property. Clean energy tax considerations are now a driving force for builders, second only to future real property valuations. This legislation is the most significant national clean energy investment to date, aiming to address carbon emissions and promote domestic clean energy production. With $500 billion allocated, it’s set to drive clean electricity resource deployment, reshaping asset ownership in the process.
The IRA introduces new options for clean energy tax credits, available starting Jan. 1, 2023, to Dec. 31, 2032. The direct pay option allows certain non-taxable entities like governments and cooperatives to receive direct payments from the IRS for tax credits exceeding their liabilities. It covers credits like ITC and PTC. Eligible taxpayers can also transfer or sell these credits to unrelated parties.
These federal credits complement state, regional, and local incentives for clean energy projects. That includes revenue from renewable energy certificates, state performance-based incentives, tax credits, property tax exemptions, grants, loan guarantees, and accelerated depreciation schedules. Bonus depreciation will gradually reduce from 80% in 2023 to 0% in 2028, benefiting those assets that can be considered separately from real estate properties.
IRA benefits for REITs
The IRA introduces changes that could enable REITs to invest in solar facilities more easily. Historically, REITs faced limitations regarding the Income Test, Asset Test, and Investment Tax Credit (ITC) when owning solar facilities. However, the IRA’s credit transfer provision allows REITs to transfer the ITC to unrelated parties for cash without including the proceeds in their gross income. This can help REITs bypass income limitations.
Regarding the Asset Test, solar facility assets may qualify as real property, while non-real property assets can be managed to ensure compliance with the Asset Test. The ITC limitation no longer applies if REITs elect to sell the ITC. However, if they retain ITCs, they must have a federal tax liability to use them.
The IRA’s changes provide unique opportunities for REITs to invest in green energy, especially if an active market for ITC transfers develops. These modifications could revolutionize REITs’ engagement with renewable energy projects, potentially creating side benefits from compliance-driven green energy installations. Plus, the IRA applies to other public and private properties as well as non-profit organizations.
Overall, the IRA has brought significant changes to real property ownership and tax provisions. Property owners should carefully assess opportunities under these new provisions for projects in 2023 and beyond. The traditional approach to building properties has evolved, requiring a reevaluation of asset ownership strategies for cost allocation, financing, and future value considerations between real and personal property.
As your trusted partner, VCA Green can help you establish an exploratory team to identify and effectively leverage these opportunities. Contact our experts to discuss customized options that can enhance financial prospects and cash flow for construction projects, as each organization or project may have unique strategic advantages to explore under the IRA.
Moe Fakih, Principal
Robyn Vettraino, Principal