Investing in real estate comes with its risks. To ensure that your money is going into the right project, you need to adapt to the changing trends. This means that developers and investors have to be on their tiptoes to keep tabs on things, such as the cost of raw materials rising, finding skilled labor, adjusting to any changes in demand, etc.
Yet there is no foolproof technique that can lessen a struggling economy’s blow. However, one thing you can take advantage of is federal tax incentives.
With the right guidance, you can benefit significantly from the value tax credits offer. Reducing taxes is just one part of real estate investments. By meeting certain requirements of specific projects, such as limiting construction costs, you can generate capital to develop low-income housing.
As a real estate developer or investor, you are probably looking for ways to maximize your returns. Dive into the world of tax credits to understand how investing in certain projects can be financially beneficial for you.
Before we list down the different types of tax credit programs you can take part in, let’s take a look at how this incentive works:
What Is Tax Credit?
Our Federal and State governments reward forward-thinking investors and developers who join hands for projects that benefit the public. Such initiatives are divided into five categories:
- Preserving historical structures
- Creating renewable energy
- Remediation of lands with contaminated or tainted soil
- New construction or renovation of structures planned for affordable houses
- Opportunity Zone – Revitalizing economically depressed areas
Real estate tax credits are financial incentives provided by the government to encourage developers to invest in specific projects that are designed to preserve historic buildings, create jobs, produce low-income housing, stimulate economic growth, and improve neighborhoods.
Tax credits help balance income tax liability, allowing developers to benefit from reduced taxes by either working with specific tax credit investors or giving buyers their credits through secondary markets.
Developers and investors must follow all guidelines and regulations associated with the tax credit program. This includes meeting deadlines, following construction standards, and maintaining the property or project according to specified requirements.
In some cases, they may need to maintain ownership of the project for a minimum number of years to benefit from the tax credits fully.
Following are ten tax credits developers and investors can benefit from:
Types of Real Estate Tax Credits
Low-Income Housing Tax Credit (LIHTC)
Low-Income Housing Tax Credit (LIHTC) is a federal tax credit program that offers tax incentives to developers building affordable rental housing for low-income individuals and families. LIHTC was introduced in 1986 and, since then, has subsidized more than three million US housing units.
This real estate tax credit allows developers to make a positive impact on their communities and provides a dollar-for-dollar reduction in federal income tax liability over 10 years. Developers must comply with strict income and rent restrictions to qualify for this credit.
Year 15 Exit (LIHTC)
As the name says, this is a tax credit program in which investors can exit their housing project after 15 years. They can either sell their interest in it or the property.
In 2017, they introduced Opportunity Zones. They created these for developers looking to take part in this tax credit program. Directing them to build houses in specific zones. Businesses that move to Federal zones can defer capital gains. Which allows them to use the savings to hire more workers.
With the help of third-party investments that fund the projects, developers cut tax from the sale. They call this profit made “Opportunity Funds.” Which they can then invest in different zones.
New Markets Tax Credit (NMTC)
This tax credit program was introduced in 2000 by Congress. It encourages investors to develop housing in low-income communities. Businesses located in these areas can qualify for loans. Residential rental properties are not qualified as low-income businesses.
Investors can claim up to 39% of their total investment in the form of tax credits over seven years.: 5% in the first three years and 6% in the next four years.
Historic Preservation Tax Credit
Participating in this program allows you to give old buildings a new lease on life while getting a much-need tax break. It promotes the preservation and restoration of historically significant buildings. Investors who rehabilitate and restore eligible properties may be eligible for 40% tax credits on construction costs.
Brownfields Tax Credit
This program was introduced in Massachusetts to encourage developers to build on contaminated land. Since the owner is responsible for cleaning the land before construction, they can negate 50% of the remediation cost.
Renewable Energy Tax Credit
This tax credit program was created in 2021 as part of the Consolidated Appropriations Act. Developers can claim a credit equal to a percentage of eligible expenditures for renewable energy projects. The ITC can be as high as 30% for solar projects and 10% for other technologies. Here’s how much the rate differs based on the construction date:
- 30% for systems installed since 12-31-2019
- 26% for systems installed since 12-31-2019 (Before 1-1-2023)
- 22% for systems installed since 12-31-22 (Before 1-1-2024)
Production Tax Credit (PTC)
This program promotes the development and deployment of renewable energy sources, particularly wind, geothermal, and biomass energy. PTC encourages the construction and operation of renewable energy facilities, such as wind farms and geothermal power plants.
Tax credit for electricity produced from solid waste resources, marine and hydrokinetic, qualified hydroelectric, open-loop biomass, and landfill gas is 1.3 cents/kWh and 2.5 cents/kWh from geothermal resources, closed-loop biomass, and wind.
This planning strategy allows real estate developers who have remodeled, expanded, purchased, or constricted any type of property to accelerate depreciation. This helps free up money for other investments.
Investment Tax Credit (ITC)
ITC was introduced in 1962 to stay ahead of foreign competition. Today, it offers tax credits for real estate projects built in areas engaging in green technology, energy conservation, and pollution control. The following are the available tax credit investment options:
- The Federal Business Energy Investment Credit
- Solar Energy Investment Tax Credit
- Rehabilitation Tax Credit
- Reforestation Credit
Tax credits for investors and developers play a vital role in promoting economic growth, community development, and investment in various sectors. These incentives not only provide financial benefits but also encourage capital flow into projects aligning with government priorities. Moreover, it offers low-income families a roof over their heads and dozens of job opportunities.
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