Another tax law was passed recently without all the fanfare of the Tax Cut and Jobs Act of 2017. The Bipartisan Budget Act of 2018 has several tax law changes that affect 2017 taxes. One of the most important changes, when combined with the aforementioned Act, is the extension of the Sec 45L credit. In a nutshell, this is a credit of $2,000 for the construction of energy-efficient residences, including apartments. For example, if you construct an energy efficient apartment complex that has 100 units, you could potentially qualify for $200,000 in federal tax credits!
Please remember that these credits, if not used in 2017, can be carried forward for another 20 years. In the past, these credits were not often used because they cannot offset alternative minimum tax (AMT). However, starting in 2018 with the doubling of the AMT exemption, and with the limitation on state tax deductions for individuals (the main driver of AMT in the past), the AMT issue will not be as prevalent as it used to be. As a result, we are contacting all of our constructed apartment owner clients to determine if they want to revisit this issue—even if it means carrying the credit over to 2018 when they should be able to use it.
Consider a recent example of how this works. A developer built 228 apartments over 2016 and 2017 – and all but five of his units qualified (please note that you cannot use this tax credit if your building is more than four floors). He is benefiting from $446,000 in federal tax savings, on top of his cost segregation study savings.
Just as a reminder, the credits occur in the year the apartment is first leased, and therefore are recorded on that particular tax return. You cannot “pick up” credits through a Form 3115 filed with a future tax return. So right now, your client can look at apartments that were first leased in 2014, 2015, 2016 and 2017. And 2014 is only available to the taxpayer until April 15, or if they want an extension for their 2014 tax return, the day that return was filed. So that window is closing fast.
The Section 45L credit can be a potentially great tax-savings tool, so if you could benefit from it, we recommend consulting with an experienced tax professional on go-forward strategies.
Do you have questions about whether you can benefit from the Section 45L credit, or other real estate or construction issues? Please contact Roger Gingerich, CPA / ABV / CVA / CCA, at 440-449-6800 or email Roger.