How will the Inflation Reduction Act Affect Landlords?

Becoming a landlord can be an excellent and unique business and investment opportunity. However, knowing the impact of inflation on real estate is vital for those who have just acquired property or long-time homeowners. Due to inflation, goods and services become expensive, making it challenging for consumers to purchase what they require. Unfortunately, real estate is not an exception.

There are several ways that inflation affects landed property. For instance, real estate development costs can increase dramatically due to rising wages and higher supply and material costs. This reality can be challenging for investors blowing budgets out of the water, especially those implementing strategies such as BRRRR, and can decrease the stock of affordable investment properties.

However, the Inflation Reduction Act (IRA) aims to help landlords and investors (amongst others) combat inflation, especially on routine expenses like utility bills. Below we shed more light on the Inflation Reduction Act, what it entails, and how it will affect landlords.

What is the IRA (Inflation Reduction Act)?

The Inflation Reduction Act (IRA) is a significant piece of American legislation that seeks to control inflation by cutting prescription drug costs, reducing the deficit, and increasing domestic energy production while supporting clean energy. On August 16, 2022, President Joe Biden signed it into law after the 117th US Congress approved it. The Inflation Reduction Act (IRA), sometimes known as the “climate bill,” aims to lower the nation’s carbon footprint by promoting innovation and cleaner energy sources.

The new law uses a significant proportion of the $379 billion allocated to produce cleaner energy with tax credits for things like purchasing electric vehicles and eco-friendly property upgrades. There are also significant portions directed at the real estate and development sectors as these are two of the greatest emitters of greenhouse gases.

How will the Inflation Reduction Act affect landlords?

1. Tax Breaks for Landlords

The IRA includes two significant tax benefits for investors and landlords to promote greener building practices and cut back on energy use in the real estate sector. These breaks can be used for both new construction and building retrofits. These schemes, the 179D tax deduction and the 45L tax credit, were initially set to end in 2021. Instead, the measure raises the maximum cash amount an owner can earn, extends these programs for at least ten years, and, in some situations, lowers the eligibility requirements for these benefits.

• 179D: If a building’s commercial or residential structure meets specific efficiency criteria, the 179D incentive offers owners a dollar amount per square foot. A building’s energy efficiency on the most recent ASHRAE scale, a standard validated by the American Society of Heating, Refrigerating and Air-Conditioning Engineers and varying by building type, can earn owners up to $5 per square foot of a newly constructed or retrofitted building. The good news is that there is a perfect chance that buildings can be eligible for this credit, whether through modifications to the appliances, the installation of new HVAC systems or heat pumps, or improvements to the building envelope’s insulation. The less desirable news is that owners must have the change in energy efficiency certified by a third party to qualify, adding to the administrative hassle.

• 45L: The 45L tax credit is intended for multifamily landlords, who, if they match the requirements, can make up to $5,000 per unit (single-family home or apartment). The initial 45L credit had a $2,000 per unit cap and was only accessible to homeowners who met the Energy Star benchmark. It is set to expire in 2021. The IRA extends that specific benefit until 2031. However, Bay Property Management Group can guide landlords in setting rental rates and gaining a profit.

You can also acquaint yourself with current allowable rental property tax deductions to better understand how rental property tax deductions currently work.

2. Clean Energy

The Greenhouse Gas Reduction Fund is a renewable energy technology accelerator run by the EPA. This fund will receive $27 billion from the IRA. A total of $7 billion of this financing will go toward competitive grants for the installation (or assistance with the installation) of sustainable energy technology, including residential installations like roof-top solar panels, in low-income and underserved regions. These grants are open to applications from non-profit organizations, states, municipal governments, and tribes.

3. Low Tax Rates

The bill’s ability to reduce the deficit with a new minimum corporation tax rate of 15% is one of its main components. This was primarily directed at giant IT corporations and other fields where tax evasion is rampant. The impact on REITs or small-scale real estate developers should be minimal to nonexistent.

For investors in real estate, this is excellent news. It implies that following the passage of this law, no new federal taxes should be anticipated.

4. Cost-effective Housing

Also included in the bill is $837.5 million for the US Department of Housing and Urban Development (HUD). This offers grants or loans to owners of affordable housing who implement energy or water efficiency, zero-emission electricity generation, low-emission building materials or processes, building electrification, and climate resilience. In addition, the bill gives aid to the Department of Housing and Urban Development to launch a new grant program to aid in affordable housing projects’ efforts to combat climate change.

5. Increased IRS enforcement

Roughly $80 billion of the bill’s spending will go to the Internal Revenue Service (IRS) where they expect to hire more than 86,000 IRS agents over the next ten years. The IRS has been underfunded over the last few years, and with this increase in budget, we can expect landlords and businesses to come under closer scrutiny from a more effective IRS.

Landlords need to ensure they’ve got the right systems in place to ensure their bookkeeping is infallible, that they’ve got all the relevant supporting documents (eg. receipts) saved and accessible, and essentially make themselves audit-proof. This is where Landlord Studio can help, with easy-to-use income and expense tracking, automated bank transactions, powerful financial reporting, GPS mileage tracker, and an in-built receipt scanner.

Conclusion

Overall investors and regular homeowners are generally expected to benefit from the Inflation Reduction Act. With funds and tax credits going towards the upgrading of their properties, and a targeted approach to reducing inflation and keeping costs down.

However, as part of this real estate investors now more than ever need income and expense tracking tools designed for them.

Find out more about Landlord Studio and how it can help you stay on top of your rental property finances →

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