The marriage of affordable housing and renewable energy got a boost Aug. 16, when President Joe Biden signed the Inflation Reduction Act (IRA) into law. The landmark climate-oriented legislation advances renewable energy efforts well beyond what was previously possible with respect to affordable housing.

The IRA provides $369 billion in clean and renewable energy provisions that feature extensions and revisions to the renewable energy production tax credit (PTC) and investment tax credit (ITC) and the new energy efficient home credit. The IRA allocates much of the $369 billion to various housing and low-income community oriented initiatives, including expanding and revising existing renewable energy tax credit incentives, in part to target housing in low-income communities by allocating $1 billion to grants and loans for improving climate resilience and energy and water efficiency in HUD-assisted multifamily housing, allocating $9 billion to the U.S. Department of Energy (DOE) consumer home energy rebate programs for energy efficiency and electrification retrofits focused on low-income consumers. The legislation also allocates $41.5 billion to the Environmental Protection Agency for tools to address climate change and advance environmental and climate justice.

Tax Credits and Incentives to Increase Energy Efficiency and Renewable Energy Projects

The three key tax incentives that include critical housing-oriented provisions are the Internal Revenue Code (IRC) Section 48 renewable energy investment tax credit (ITC) and production tax credit (PTC), the IRC Section 45L new energy-efficient home credit and the IRC Section 179D commercial buildings energy-efficient tax deduction. Treasury released six notices seeking public comment on climate and clean energy tax incentives included in the IRA, due by Nov. 4, with subsequent guidance expected to be released in early 2023.

Here is a breakdown of the three noted provisions:

IRC Section 48: The IRA extends the ITC and PTC (PTC with respect to solar energy), retroactively from Jan. 1, 2022, for 10 years and increases the base credit from 26% to 30%, assuming the property is less than 1 megawatt, meets prevailing wage and apprenticeship requirements or development begins within 60 days from when the prevailing wage and apprenticeship guidance is released, which is anticipated by early 2023. Importantly, the IRA creates bonuses or add-on credits that can potentially push the ITC up to 70%. The add-ons include a 20% credit for multifamily developments financed by the low-income housing tax credit (LIHTC) and other federal housing programs or a 10% bonus if the development is in a low-income community, as defined by the New Markets Tax Credit program. There is an annual cap for these two add-ons of 1.8 gigawatts, which will be determined in further guidance from Treasury. There is also a 10% bonus for using domestic materials on an ITC project, with the required portion of the project needing domestic content ranging from 20% to 55% to be eligible for the bonus, depending on when construction begins and the type of project. Finally, there is a 10% bonus available for facilities located in “energy communities,” which include brownfield sites and certain census tracts where fossil fuels contributed significantly to employment or where coal mines closed and coal-fired power plants were retired relatively recently.

The following is a comparison of IRC Section 48 before and after adoption of the provisions included in the IRA:

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The ITC is earned and allocable immediately upon placing the property into service and, critically, no longer decreases or is removed from LIHTC eligible basis. Accordingly, the in addition to the ITCs generated, the property can also generate LIHTCs in an eligible entity, in particular for 4% LIHTC bond deals where additions to basis typically produce additional tax credits. Finally, the IRA now allows recipients of the ITC and PTC (and certain other tax credits) to monetize the credits either by the direct pay option set forth in IRC Section 6417 or by transferring all (or any portion of) the tax credit to another taxpayer under IRC Section 6418.

IRC Section 45L: The new energy-efficient home credit has been overhauled and substantially improved. Pre-IRA legislation will be used for properties placed in service in 2022 to provide tax credits up to $2,000 per units to developers to build homes that qualify for the DOE’s Zero Energy Ready Homes standard. Starting in 2023 the amount can range from $500 to $5,000, depending on if the property meets Energy Star or the DOE Zero Energy Ready Homes requirements and if prevailing wages conditions are met. The credit applies to new single-family, multifamily and manufactured homes, as well as existing homes that undergo a deep retrofit.

IRC Section 179D: The commercial buildings energy efficient credit increases the deduction for properties that achieve higher levels of efficiency, offering $2.50 to $5 per square foot for businesses achieving 25% to 50% reductions in energy use over existing building performance standards. This provision may be of limited benefit for LIHTC properties due to eligible basis implications but can potentially be used by the respective developers or contractors in place of the property-owning partnership or LLC.

$1 Billion HUD Climate Resilience, Energy and Water Efficiency Program

The IRA allocates $1 billion to grants and loans for improving climate resilience and energy/water efficiency in HUD-assisted multifamily housing. The Green and Resilient Retrofit Program (GRRP) will be administered as part of HUD’s Climate Action Plan and properties participating in HUD’s multifamily assisted housing programs (e.g., Section 8, Section 202 and Section 811) will be eligible for these property improvements. Multiple rounds of grant and loan funding are anticipated to deploy the proceeds and all funds will be disbursed by September 2028.

$9 Billion Department of Energy Consumer Home Energy Rebate Programs

The IRA provides $9 billion in rebates to households for high-efficiency electric appliances and whole-home energy retrofits. Of this amount, $4.3 billion will be available through the High-Efficiency Home Electric Home Rebate program with funding of up to $14,000 per household disseminated as point-of-sale rebates for electrification upgrades. Qualified projects include heat pump water heaters and HVAC systems, electric cooking appliances, heat pump clothes dryers and upgraded circuit panels, insulation, air sealing, ventilation and wiring. Further, $4.5 billion is allocated for efficiency and electrification rebates under the Home Energy Performance-Based, Whole-House Rebates program, allocating multifamily building owners up to $8,000 per unit for qualifying energy efficiency improvements, with low-to-moderate income multifamily properties qualifying for higher incentive levels. Funding will be allocated under these programs by state energy offices by 2031.

$41.5 Billion Environmental Protection Agency to Address Climate Change and Advance Environmental and Climate Justice

Included in the $41.5 billion, the IRA provides $27 billion in financial assistance for activities that help to reduce greenhouse gas emissions, $15 billion of which will serve low-income and disadvantaged communities, $7 billion of which will enable communities to benefit from zero-emission technologies. The EPA will begin deploying funds in February 2023 and conclude by August 2024 and the exact mechanics of the funding is currently being configured.

The following is a graphic identifying how the $27 billion in EPA funding will be deployed:

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