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New Energy Bill offers tax breaks for real estate.

The new federal Energy Tax Incentives Act of 2005 (the "Act") offers a variety of income tax breaks for taxpayers making energy-efficient improvements to commercial or residential real estate.

These tax breaks range from a deduction of up to $1.80 per square foot for owners of commercial property, to a tax credit of up to $2,000 for taxpayers installing solar, photovoltaic, or fuel cell systems (or lesser credits for other energy-saving devices) in their homes. This bill has been passed by the House and the Senate, and is expected to be signed by President Bush on August 8, 2005.

Commercial Real Estate: Deduction of $1.80 The new bill creates a deduction of up to $1.80 per square foot for the cost of certain energy-efficient improvements to new or existing commercial buildings. The maximum deduction is equal to (A) $1.80 per square foot of the building ($.60 per square foot, if only certain separate building systems qualify), less (B) the aggregate amount of such deductions allowed for the building for prior years. The new deduction is available only if the new improvements meet all of the following conditions:

(1) The improvements are made to the following building components: (1) the interior lighting systems, (2) the heating, cooling, ventilation, and hot water systems, or (3) the "building envelope." The "building envelope" includes insulation materials (and other systems primarily designed to reduce heat loss or gain), exterior windows (including skylights), and exterior doors.

(2) The new improvements must reduce the total annual energy costs by 50% or more in comparison to a reference building which meets the minimum requirements of Standard 90.1-2001 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America (ASHRAE/IESNA) (as in effect on April 2, 2003).

Detailed certification and inspection requirements, involving qualified professionals, must be satisfied before the deduction may be taken. Since the IRS still must promulgate regulations explaining how the fuel savings targets are to be measured, it is not clear how difficult it will be to obtain these new commercial tax deductions.

If a building does not meet the 50% energy savings target, nonetheless a partial deduction of up to $0.60 psf is allowed for any of the above building components that is certified by a qualified professional to meet the applicable energy-savings target established by the IRS. These targets will result in aggregate annual energy savings with respect to the whole building of 50%, if each of the above separate building components meets the target for such component.

Until the IRS issues its regulations, the system specific energy savings target for lighting systems is a reduction in lighting power density of 25% (50% in the case of a warehouse) of the minimum requirements in Table or Table (not including additional interior lighting power allowances) of ASHRAE/IESNA Standard 90.1-2001. Also, in the case of a lighting system of a non-warehouse building that does not reduce lighting power density by at least 40%, only a prorated partial deduction is allowed. Certain lighting level and lighting control requirements must also be met in order to qualify for the partial lighting deductions.

The new deduction for energy-efficient commercial buildings applies to property placed in service after Dec. 31, 2005, and before Jan. 1, 2008. Commercial property owners may also be entitled to additional tax credits for qualified fuel cells, microturbines, and solar systems.

New Home Developers: Tax Credit up to $2,000. Developers can qualify for a new tax credit when they construct, or substantially rehabilitate, qualified energy-efficient homes and sell them to residential purchasers. The credit is either $2,000 or $1,000 per qualifying home. For a home to qualify for the $2,000 credit:

(1) it must be located in the U.S.;

(2) its construction or substantial rehabilitation must be substantially completed after the Act's enactment date, and it must be acquired by the ultimate residential purchaser in 2006 or 2007;

(3) it must be built by the "eligible contractor" (the person who constructed or rehabilitated the home, or the manufacturer, if the structure is a manufactured home); and

(4) the home must be certified, in a manner to be determined by the IRS, to have a projected level of annual heating and cooling energy consumption that meets the standards for a 50% reduction in usage, compared to a comparable dwelling built in accordance with the standards of chapter 4 of the 2003 International Energy Conservation Code as in effect (including supplements) on the date of the Act's enactment, and the Federal minimum efficiency standards in specified Department of Energy regulations, and its building envelope component improvements must account for at least one-fifth of the 50% reduction.

A manufactured home qualifies for the $2,000 credit if it meets the above requirements, and it conforms to Federal Manufactured Home Construction and Safety Standards. A manufactured home qualifies for a $1,000 credit if it conforms to Federal Manufactured Home Construction and Safety Standards and meets either of the following two conditions:

(1) It is certified to have a projected level of annual heating and cooling energy consumption that meets the standards for a 30% reduction in usage, and its building envelope component improvements account for at least one-third of the 30% reduction, or

(2) It meets the requirements established by the Administrator of the Environmental Protection Agency under the Energy Star Labeled Homes program.

Nonbusiness Tax Credit to Individuals for Solar, Photovoltaic and Fuel Cells. The new law provides a 30% tax credit to individuals for the purchase of 1) photovoltaic equipment (i.e., equipment that uses solar energy to generate electricity), 2) solar water heating property, and 3) qualified fuel cells. The 30% credit is subject a $2,000 maximum for photovoltaic systems, a separate $2,000 maximum for solar water heating systems, and a separate maximum of $500 for each 1/2 kilowatt of capacity for qualified fuel cells. Solar water heating systems must be certified by the Solar Rating Certification Corp. or a comparable entity. Any expenditures allocable to swimming pools, hot tubs, or any other energy storage medium which is used for any purpose other than energy storage, are ignored. Labor costs related to installation qualify for the credit.

The credit is subject to the Code provision which limits the amount of various nonrefundable personal credits that are allowed in a tax year. However, the portion of the credit that is not allowed because of this limitation may be carried to the next tax year and added to the credit allowable for that year.

The credit applies to equipment placed in service after December 31, 2005 and before January 1, 2008. Special proration rules apply in the case of jointly owned property, condominiums, and tenant-stockholders in cooperative housing corporations. Also, if less than 80% of the property is used for nonbusiness purposes, only that portion of expenditures that is used for nonbusiness purposes is taken into account. The photovoltaic, solar, and fuel cell systems must be installed in a dwelling located in the U.S. and used by the taxpayer as a residence (except that any fuel cell must be installed in the taxpayer's principal residence).

Homeowners: Tax Credit up to $500 for other energy-efficient improvements. An owner of a home who makes other qualifying in energy saving improvements to the home will be able to claim a $500 lifetime tax credit for part of the cost of such improvements ($200 for windows). Subject to the $500/$200 lifetime caps the credit equals the sum of the amounts in two categories:

(1) A credit may be claimed for 10% of the cost of "building envelope" components such as insulation, exterior windows (including skylights) and exterior doors, and metal roofing with pigmented coating to reduce heat. These components must be "reasonably expected" to remain in use for at least five years and their "original use" must begin with the taxpayer.

(2) The credit for other kinds of energy-saving property is subject to specific caps. The cap is $50 for an advanced main air circulating fan, $150 for a natural gas, propane, or oil furnace or hot water boiler, and $300 for any other energy-efficient building property (such as a heat pump). Eligible expenses include labor costs for onsite preparation, assembly, and original installation of the property.

The above improvements must meet certain energy-saving criteria. Further, the first use of the above improvements must begin with the taxpayer, and such improvements must be installed in a home which is owned by the taxpayer and used as the taxpayer's principal residence, and such home must be located in the U.S.

The $500/$200 credit applies to property placed in service after December 31, 2005 and before January 1, 2008.

State and Local Law. Additional tax benefits may be available under state and local law, such as the "green building tax credit" under Section 19 of the N.Y. Tax Law.

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Author:Boyd, Brook
Publication:Real Estate Weekly
Date:Aug 17, 2005
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