Optimized tax strategies are critical in today’s competitive commercial real estate market. The good news is that the U.S. tax code offers a number of incentives and deductions designed to help multifamily property owners reduce their tax liability, increase return on investment, and improve cash flow. However, keeping up with evolving regulations and requirements isn’t always easy. This article provides an overview of six important tax strategies you should know about and discuss with your tax advisor.

Cost segregation studies

And this is how they work: A cost segregation study is a strategic tax planning tool that allows multifamily property owners to accelerate depreciation and reduce tax liability in the early years of ownership. This study involves a detailed analysis by engineers to categorize various building components such as roofing, plumbing and wiring, with each component having its own depreciation schedule.

Main advantages: By accelerating depreciation, property owners can significantly reduce their federal tax liability, improve their cash flow, and potentially free up capital to reinvest in their properties or other investments. Retrospective cost segregation studies can be performed retroactively for properties purchased, remodeled, or expanded in prior years, allowing owners to claim disallowed depreciation in the current tax year.

What you should pay attention to: Cost segregation is an effective tool for multifamily property owners to optimize their tax strategy and maximize the return on their investments. The studies require the expertise of licensed engineers and tax professionals due to the detailed physical inspection and classification of building components. Therefore, cost segregation studies are typically recommended when property owners make purchases or building improvements valued at over $500,000.

45L tax credit

And this is how it works: The 45L tax credit is a federal tax incentive to encourage energy efficiency in residential construction, including multifamily housing. To qualify for the credit, properties must be certified by a recognized professional using IRS-approved software.

Main advantages: The 45L credit, which ranges from $500 to $5,000 per unit, depending on the energy efficiency achieved and whether applicable wage requirements are met. can significantly offset the costs of building or renovating energy-efficient multi-family homes. The credit has been extended until 2032 and can be applied retroactively to eligible projects by filing an amended tax return.

What you should pay attention to: The certification process requires careful planning and documentation. Multifamily property owners should work closely with energy consultants and tax professionals to ensure compliance and maximize benefits.

179D Tax deduction

And this is how it works: The 179D tax deduction is designed to encourage energy-efficient improvements in commercial buildings, including multifamily buildings, that are at least four stories tall. To qualify for this federal deduction, the new construction or major renovation must achieve a certain level of energy savings compared to a baseline standard, which includes improvements to the building envelope, HVAC systems and interior lighting. To claim the deduction, a third-party expert must certify that the building meets the required energy efficiency standards. The IRS now requires Form 7205 to be filed to claim this deduction, and it must be completed by the vendor who prepared the 179D study.

Main advantages: Starting in 2023, the maximum deduction was significantly increased, from the previous limit of $1.88 per square foot to $5.00 per square foot, following changes introduced by the Inflation Reduction Act (IRA) of 2022. In addition, the IRA reduced the required minimum energy savings from 50% to 25% and introduced a new bonus rate available in addition to the basic deduction. To qualify for the bonus deduction, property owners must meet local wage and training requirements for laborers and mechanics hired for the project.

What you should pay attention to: All improvements must meet certain energy efficiency standards defined by the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) four years before construction is completed. Maintaining comprehensive records of the energy efficient improvements, the certification process, and associated costs is essential. Meeting applicable wage and training requirements required for the highest deduction amounts can increase labor costs and make the compliance process more complex.

Provisions on material property

And this is how they work: The Tangible Property Regulations (TPRs) determine the tax treatment of repair and improvement costs to tangible property. Repairs that maintain the property in its current condition are generally deductible in the year they are made, providing immediate tax benefits. Improvements that increase value, extend useful life, or adapt the property for a new use must be capitalized and depreciated over time, so the tax benefit is spread over several years.

Main advantages: TPRs give multifamily property owners the ability to deduct repair costs immediately, which can significantly reduce taxable income in a given year and improve cash flow. Deductions can also be taken retroactively by filing Form 3115 in the current tax year as an automatic change in accounting method.

TPRs contain safe harbor provisions that provide additional flexibility in the treatment of expenses. The partial disposition option provided in the regulations allows property owners to account for losses on the disposal of parts of a property, providing strategic opportunities for tax management.

What you should pay attention to: Correctly classifying expenses as repairs or improvements is essential, as incorrect classification can result in penalties and higher tax liabilities. TPR compliance requires detailed recordkeeping and documentation to support expense categorization and safe harbor elections. Consulting with experienced tax professionals ensures property owners can maximize TPR thresholds and partial disposal options.

Tax provision for pass-through companies

And this is how it works: The pass-through entity (PTE) tax provision can be a valuable tax strategy for multifamily property owners when state tax liabilities exceed the $10,000 deduction limit for state and local taxes (SALT). The provision allows pass-through entities such as partnerships, S-corporations, and LLCs to pay state income taxes at the entity level rather than passing them on to individual owners.

Main advantages: By shifting the tax burden to the corporate level, owners can benefit from the full deductibility of state taxes on federal taxes. This reduces the total taxable income passed on to them and effectively avoids the SALT cap for individual owners.

What you should pay attention to: It is important for property owners to carefully review the specific rules and benefits in their state. Some states offer full or partial tax credits for PTE taxes paid, while others offer income exclusions or alternative benefits. Multifamily property owners with property in multiple states should work with their tax advisors to evaluate the potential impacts and navigate the complexities of varying state regulations.

Tax credit for solar investments

And this is how it works: The Solar Investment Tax Credit (ITC) provides multifamily homeowners with a substantial tax credit for solar energy systems placed in service after December 31, 2021, through the end of 2032. The credit is currently 30% of the installation cost. The ITC is scheduled to decrease to 26% in 2033 and 22% in 2034.

In addition to the basic credit, multifamily property owners may also be able to claim additional incentives, such as an additional 10% credit for using domestically produced materials and an additional 10% for installations in certain economically depressed areas or brownfield sites. In addition, properties with low-income household tax credits (LIHTC) may be able to claim solar tax credits without a reduction in eligibility based on provisions in the IRA.

Main advantages: The ITC allows for significant tax savings and greatly reduces the overall cost of a solar installation. Property owners have the option of purchasing and owning the solar installations outright to claim these tax credits. Alternatively, in some states, they can opt for third-party ownership models where someone else owns the installation. This can simplify the process for property owners who do not want to manage the solar infrastructure directly.

What you should pay attention to: State-specific regulations, including third-party ownership rules and additional incentives at the state level, can vary widely. Consult a tax professional to ensure you are optimizing current opportunities and complying with all applicable regulations.

CBIZ’s dedicated commercial real estate experts can help you identify and optimize tax savings opportunities for your properties. Contact a member of our team and access additional resources here.

This article contains contributions from Neil SonenbergManaging Director and Co-Head of the Real Estate Practice at CBIZ Marks Paneth, and Larry RosenblumManaging Tax Officer at CBIZ CPAs PC. Neil and Larry specialize in serving commercial real estate clients and provide their clients with expertise in commercial real estate tax planning and cost segregation.

	With a potential recession on the horizon, we know you need resources to help your business navigate the situation. We’ve put together our Agility & Excellence Resource Center to provide you with strategies and solutions that are always on the cutting edge.