The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 86 - Tax Credits for Real Estate Developers w/ Rick Kleban & Steve Wyatt
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Tax credits offer dollar-for-dollar reductions in tax liability, making them substantially more valuable than deductions that merely reduce taxable income. The 45L tax credit provides qualifying real estate developers with $2,000-$5,000 per residential unit for energy-efficient new construction.
• Available to builders with tax basis in the property during development (track builders, not custom home builders)
• Requires construction of at least 40 residential dwellings annually to be cost-effective
• Pre-2023 properties needed to be 50% more efficient than 2006 IECC standards
• Post-2023 properties must meet Energy Star requirements
• Multifamily developers must meet prevailing wage requirements for the higher credit amount
• Properties can qualify for up to $5,000 per unit if they meet "zero energy ready" standards
• Credits can be claimed retroactively by amending returns from the past three years
• Professional assessment includes blueprint evaluation, energy testing, and certification
• Real estate developers may also qualify for R&D tax credits on engineering expenses
• Typical R&D credits amount to 7-10% of qualifying engineering costs
Visit the link in the show notes to schedule a free assessment with Sycamore Growth Group to determine if your properties qualify for these valuable tax credits.
To learn more about what they do at Sycamore Growth Group go to: https://www.sycamoregrowthgroup.com/
Welcome to the.
Speaker 1:Mark Kroger CPA podcast. I'm super excited to bring Steve and Rick from Sycamore Growth Group, where we talk about creating the most tax advantage opportunities all the time for our clients. So I'm very excited to explore a very overlooked tax incentive here, which is the tax credit. And we love tax credits because, unlike deductions, where you reduce your taxable income, with a credit that's a dollar for dollar return of your cash. So we're going to discuss the 45L tax credit available for real estate investors and how you may be able to identify and take advantage of this. And I have Rick and Steve. Rick can you introduce yourself briefly and then Steve I'll have you go next. Rick can you introduce yourself briefly and then Steve, I'll have you go next.
Speaker 3:Yes, I'm Rick Cleveland, the founder of Sycamore Growth Group. We're a specialty tax advisory firm that focuses only on credits, and we've been doing this for 13 years and we're proud to say we've run north of $100 million in credits passed through our firm and our clients have been able to keep those. So we take compliance very seriously and that's paid off for our clients.
Speaker 1:Awesome. Tell us about you, Steve.
Speaker 2:Yeah, steve Wyatt, I'm the Vice President of Business Development at Sycamore Growth Group and I've got 15 years dedicated to working with CPAs and clients, helping them navigate various tax incentives including the 45L credit, right?
Speaker 1:So I know you guys have spent a lot of time thinking about the R&D tax credit, another thing that's overlooked really popular for people starting new businesses and building new processes and systems, big for engineers and other folks. But we're going to focus today on an even lesser known opportunity called the 45L credit. What can you tell me about in a nutshell here? What is the 45L credit?
Speaker 2:The 45L credit is an energy efficiency credit and it's available to residential builders. So that can be a home builder or it can be a multifamily apartment builder that can qualify. So any residential dwelling can qualify that the builder must have basis in the property during development. So custom home builders usually aren't the credit's usually not available to them. But in the home building space a lot of times track builders can be good candidates for the 45L credit. And I mentioned any kind of multifamily development can be good kind of multifamily development can be good. So really anybody that's building more than 40 residential dwellings in a given year where they have the tax basis in that property during development, they should evaluate their potential for the credit, which can be anywhere between $2,000 to $5,000 per dwelling depending on the tax year and fact pattern of the client.
Speaker 1:Very cool. So when you say custom home builders can't do this, why is that?
Speaker 2:Because typically they don't have tax basis in the home during the building of the property. A lot of times with custom home builders, the homeowner will buy a property and hire a contractor to come in and build the property, versus with track homes. A lot of times the builders are owning the property and have the basis in that property during the construction phase and that's the trigger for the credit.
Speaker 1:Gotcha.
Speaker 3:So, if this is correct me, if I'm wrong here, and I might be because we have not had the opportunity to take advantage of this.
Speaker 1:yet this is if we have, if the home is, whether it's inventory, or, let's say, we're a landlord and it's a rental. So by inventory I mean if we're flipping properties, if we're real estate developers or if we are long-term multifamily investors and we're renting it out to tenants in both situations could we qualify potentially for the credit.
Speaker 2:Well, it has to be a newly constructed property. So usually we're looking for ground up new construction. So, again, in the event that you know you're an investor that has 40 or more of those in a given year new dwellings, newly constructed dwellings and I would say, yeah, they would meet that criteria, okay great.
Speaker 1:So as long as we are the person who has owned it from day one, whether we're owning it for the purpose of selling it at a profit like we're a flipper, or if we are owning it to eventually be a long-term rental, either way, we have the opportunity to get the credit.
Speaker 2:Correct. Yes, okay, great, great. And so tell us about what do we who now let's talk about? What do we have to do if we're building these houses to make sure that they, to evaluate and see and prior the requirements for the credit, are based on IECC standards and being 50%, having 50% savings compared to the 2006 IECC standards? And based on my experience and most of my exposure has been in the southeast, in and around the Atlanta area, florida, alabama In my experience, what I'm hearing from builders is the building code requirements in these areas are increasing every year from an energy efficiency standpoint. Where to get a certificate of occupancy, you must meet these energy guidelines and just meeting those requirements qualifies them a lot of times for this incentive 2022 and prior. Oh, sorry, continue 2022 and prior.
Speaker 1:Oh sorry, Continue.
Speaker 2:And the credit value in that year and those years is $2,000 per qualified dwelling. Many taxpayers aren't aware that you can go back and amend returns. You can go back three years and amend. So if this is something that you think you've missed, you can always evaluate. Is something that you think you've missed, you can always evaluate and we can just have one of our engineers look at the plans and come back and, just based on the fact pattern, let them know what if they would qualify and, if they don't, kind of what areas from a design standpoint can be changed to meet that requirement in the future.
Speaker 2:But we had a very high qualification rate, um, with both um residential home builders and com and multi-family developers prior to, you know, 2022 and prior. Now starting in 2023, um, there's uh, there's a new requirement that properties must meet the Energy Star requirements to qualify for 45L. So both multifamily and residential must now meet Energy Star and that's a tick above the previous requirements from an energy design standpoint. So, again, depending on where clients are, especially in the multifamily space, many of them are right there or close to qualifying Again, just using quality components in their properties and meeting the standards the jurisdictional code standards to get a certificate of occupancy a lot of times is getting them close to Energy Star certification, so that's a new requirement in 2023 forward, 2023 forward. In addition to that, in the multifamily space, to qualify for the higher credit, which is $2,500 per unit, they must also meet prevailing wage requirements, and only in the multifamily space. The single family housing space. Prevailing wage is not a requirement for 2023 forward.
Speaker 1:Great, so let's talk about so. For those of those folks here who are building homes or I guess if you were, you know building a home for your own personal residence Tell us about the specific attributes. Actually, I'm trying to learn more about the specific attributes we're looking at here and it looks like the probability is pretty high.
Speaker 1:This is a newer home, we're going to be able to get this credit. So tell me a little more about the purpose of this credit and what they're looking for, and what attributes you kind of need for this to make sense.
Speaker 2:I think the overall intent is to reduce the energy consumption of each home, right? So you know, if you look at the qualifying, a lot of the qualifying components that drive the certification it's going to be the SEER rating of the HVAC units that are installed, the quality and type of insulation that's included in the walls, ceilings, how well the attics are sealed, everything types of windows, doors that are used. Again, the ceiling techniques that are used, framing, different framing techniques can all play into different aspects of the qualification. But those are the main areas kind of to look for for. But I think the main intent is, you know, just reducing the amount of you know energy consumption from each home.
Speaker 3:Very cool. Can I ask you a quick question, steve? Is there a scenario where someone, if they were doing a gut job on like some apartment buildings and then brought them up to this energy star or standard, would there be an avenue for them to get credits?
Speaker 2:potentially right with with renovations it's it's a little tougher, you know it has to be a complete gut because you are talking about the insulation, windows, doors, everything that's um that's taken into consideration.
Speaker 1:Very cool. Tell me about who may not qualify. So we have people listening who are interested in this, but they're end low. What attributes would say disqualify people in building these new homes? So this sounds, you know, for someone like me who doesn't build homes, it sounds like with some of the regulations and coding, it sounds like you're going to have to do this anyway.
Speaker 1:So who may not be able to do this? Who's going to be able to listen to? Who would be listening to this and have to find out? Okay, this doesn't fit our model for what we're looking to accomplish. I build this type of home which doesn't qualify. What type of people are those?
Speaker 2:Yeah, so anybody that's not constructing a new home would disqualify right. And you know it's more for those builders again that have a volume of about 40 or more new residential dwellings per year where it's going to be cost beneficial to hire a firm like us to come in and do the testing that's required.
Speaker 3:Yeah, not just it.
Speaker 2:With prevailing wages. With prevailing wages.
Speaker 3:So what we help our clients with is one we have our engineers look at the plans to make sure that it looks like they'll qualify and if not, we have our engineers recommend here are the things you could change to it that would allow you to be qualified Obviously. Then the client's team figures out whether or not that's readily doable. You know, is it going to be inexpensive to get that? So you have to go through that step. Then you have to go through tests, where you have, like, a blower door test, which they have to do right when you have the insulation up, because there's some tests that have to be done before the drywall's up. So it's a multi-step process. And then you'll get an actual official certificate from an engineer that will go and rate the property. So you can see there are a lot of steps there. So can a single person go through it? Absolutely. The only question is is that the best use of their time?
Speaker 1:okay, cool. So let's talk about the a little more about the execution here. So what is the execution? What?
Speaker 1:let's say, you're building new homes and this sounds like it's likely and it sounds like, for most new home builders of residential units, as long as you have enough scale to justify your investment, because if you're doing one little house, if you're only doing a handful of houses, it may not be, but let's say we're building a decent portfolio of houses here. Well, I'm curious to know a little more. How is the credit calculated and how do they go? Obviously the simplest thing here. We're not DIY tax credit calculators here, I mean even us, we would leverage a specialist. We don't do this stuff when it gets really, really granular like this. But for someone out there, tell us a little more about how is this credit calculated and how do they go about the execution with you guys in taking advantage of the tax credit.
Speaker 2:Good, yeah, so to answer the first part of your question, first, it's calculated simply by the number of qualified homes that are leased or sold in a given tax year. So if you're closed, you know we just closed out tax year 2024. So for that particular year we would look at every home that was placed in service or leased or sold in that tax year that meets the criteria for the credit, um, and then in that tax year it would be twenty five hundred dollars, um if they meet the the base energy star, you know level uh per home and that's a dollar for dollar tax credit. It's not a deduction. There is a tax impact to the credit, so there's a net effect based on your tax rate. But that will be applied each tax year to offset income tax, just like it's a general business credit that if it's not all used in the current year, the remaining credits can be carried back one year and carried forward for 20 years. So very similar to the R&D credit in terms of how it's applied and and carry forward and back.
Speaker 2:But in terms of our process, initially what we do is we provide a free consultation with the client, just kind of more of a feasibility analysis to number one, learn about their projects in the last three years Because, again, right now we can go back until 2021, and those tax years are still open to evaluate.
Speaker 2:So we would look at any projects from 21 to now and then what they're kind of planning in the future, and look at the projects that make sense to analyze, based on their fact pattern, and then assess their blueprints and then come back and determine whether they're going to meet the criteria in that given year and then we would provide an engagement, you know, according to that, and our engagement would include the upfront analysis to make sure that, from a design perspective, they're meeting, sticking with the criteria on a go-forward basis and then also helping administer if there's a prevailing wage requirement. We have a software partner that we work with that we help with the administration of the prevailing wage requirements, so we kind of offload all this administratively from the client and allow them to focus on their business, and that's all part of our scope, of our project.
Speaker 1:Okay, great, and you said it's $2,500, but does it go higher than that? I think it can get higher than $2,500.
Speaker 2:Yeah, you know it does. You can get to $5,000 if you meet the zero energy ready requirements.
Speaker 3:But those would be single family homes right, not apartments.
Speaker 2:Apartments as well. Oh really, both can meet that criteria. And zero energy ready means not necessarily that it's zero energy, but it's stubbed for zero energy, meaning it's stubbed for solar panels. So you don't have to have solar panels installed, but you have to have it again stubbed and ready to go to support solar panels.
Speaker 1:Oh, very cool. Yeah, you know we've been riffing a lot on solar panels lately and we're encouraging our clients to get them, because if it's on your primary residency, you get the tax credit and you can reduce your energy bill. If you're a landlord and you get the tax credit and you get to depreciate the panel, and most of these vendors will create a purchase arrangement where you're financing it over like 25 years, so you don't even feel the hit of the purchase. In fact, your monthly charge to finance the purchase of the panels is less than the cost of the energy. So overall your costs are going down and your taxes are going down at the same time. So there's very few opportunities which we love where you're spending little or either nothing, or even if you spend nothing at all, to reduce your taxes. There are some instances, like PTE, passive Energy Tax Selection where you're paying your state taxes up front, or maybe you take advantage of the Augusta Rule where you would have been, you're paying yourself rent and the money returns to your pocket anyways. But with this, this is a way where you know again where you're not really spending money to reduce your taxes as well. With the solar tax credits, in fact, you can reduce your overhead at the same time, which is really exciting for our clients. And then with tax credits as well, it's not like you're really spending any more money to buy.
Speaker 1:There's so many tax planning strategies out there and a lot of them can be very capital intensive. If you want to put all your money into a pension plan or 401k or even with real estate, you got to buy the real estate and you got to. Before you do that, cost seg, that's going to take a lot of money for the down payment. But here is one of the opportunities cost seg and that's going to take a lot of money for the down payment. But here is one of the opportunities whether with the 45 l credit and then maybe stacking it with solar, where you're not really spending more money, you're just following the rules and taking advantage of the tax incentives in the code to reduce your taxes. So it's more about just being aware and savvy and you don't really have to spend more money. You just need to have a little better knowledge or the right team around you and the right team of advisors to help you take advantage of these opportunities, as you guys are.
Speaker 1:And I know you guys have a lot of experience in the tax credit space, and one of the things we're going to be exploring, in addition to solar, is some tax incentives to create retirement accounts for our clients as well, and there's these really cool incentives. If you want to create retirement accounts for our clients as well and you know there's these really cool incentives you want to build retirement account plans for your clients and things for your staff and things of that nature. I'm wondering what in the world of tax?
Speaker 3:credits in addition to the 45L gets you guys excited and are you seeing for the clients? Well, for us, we're heavy in research and development task credits. That's our long suit and that actually would include any developer who's like you're doing a big project, so you're hiring engineering for mechanical, electrical plumbing, but also engineering like civil engineering for the lay of the land and everything. Many times we're able to qualify those expenses as eligible R&D activities, even though they're just a builder, a developer Interesting.
Speaker 1:So Rick is either in deep thought or his screen is frozen. Oh, there you are again.
Speaker 3:Oh, yeah, it was. Uh, yeah, um, internet was not being our friend for a moment. Um, yeah, so, yeah, what I was saying is that, um, people may be surprised to learn that if you're developing a property like you're building, let's say, maybe a multi-use property, well, you would be hiring a lot of engineers to do HVAC, electrical plumbing, the civil engineering work, hiring contractors to build all those things, and then you, as a developer, you own that and you're leasing out all the everything to everybody. But as the owner, you could be eligible for R&D tax credits, because all of that engineering that we talked about are custom engineered product projects, which is kind of almost the definition of engineering. And if you spent, you know, two million dollars cumulatively on HVAC, electrical, plumbing and other civil engineering work, then that could be as much as a two hundred thousand dollar tax credit for you.
Speaker 1:Yeah, that's pretty awesome. I mean think about. So let's talk about the high end, like at a high level, here. The concepts here are so if you're developing you know, to my understanding, and you can probably explain this better than me if you're developing a system or a product or an operation from scratch, you have the opportunity to potentially treat this as an R&D cost, and then the government pays for a portion of this with the tax credits. Can?
Speaker 2:you tell?
Speaker 1:me, especially because we have a lot of real estate investor and developer types of relationships, and clients tell me about some features that we would see that would also get us that R&D type of opportunities for people in real estate space. And I'll tell you what I guarantee you 90% of the people who qualify this are unaware of this. So I'm interested to hear your thoughts on what can we tell these guys so they can learn what they're missing out on and how they can get this.
Speaker 3:Well, I'd say anybody who either has their own engineering people working on it, like they actually have a staff, or if they're hiring engineering firms or just custom, like a custom HVAC installer who's building, designing and building the system for them. If they've done that, they probably have eligible R&D expenses. So you can imagine, if you're doing anything where it's more than just, you know, a $50,000 investment, all of a sudden you're probably hiring engineers and you're probably doing things that are making you eligible and it'll be, basically it'll be 7% to 10% of whatever you spent. And someone may say well geez, I just did a $2 million project and we spent half a million on all those subsystems you just talked about and we're depreciating it and everything. So we're getting some tax deduction benefit.
Speaker 3:And they're saying are you saying we could also get credits on that? And the answer is usually yes. So you're saying are you saying we could also get credits on that? And the answer is usually yes. So you're like, really, so if we identify $500,000, how much will we get in credits? In this case, because you're hiring a contractor to do it. There's a little bit different math formula, but it'd still be $35,000.
Speaker 1:Wonderful Okay, really cool stuff. I know that we had some technical difficulties and you probably have other stuff to do, but I really enjoyed this conversation, especially because we have so many real estate investor clients, and I think that this is one of the things that people may be interested. I'm also interested to know if there are any partnerships out there where you can invest passively and then see the tax credits flow through, or maybe, if you don't need the tax credits, you could sell them at a profit and then it's an untaxed profit, which is really cool.
Speaker 3:Unfortunately, right now, neither the R&D tax credit nor the 45L credit are transferable.
Speaker 1:Because I heard there's a movement to be able to buy and sell federal tax credits.
Speaker 3:Well, actually that's. We were talking to the House Ways and Means Committee and the Senate Finance Committee about that very thing. We actually went in there saying, hey, for small businesses, these credits should be refundable, because they usually don't have enough tax liability to use them all immediately, all immediately, and what we learned very quickly is that neither Republican nor Democrat had an appetite to make those credits refundable. So what's a refundable credit? You go hey, I don't owe any taxes, but I got $100,000 in credits. Irs is going to send me a check for $100,000. So both parties say no.
Speaker 3:However, what they're OK with is the idea of making it transferable, which is what you're getting at, mark, because if it's transferable, that means I'm going to transfer to somebody and I'm not going to give it to them for free. I'm going to sell it to them for typically 75 cents to 80 cents in the dollar, which is great if you can't use the credits right now. So that is what we've been asking them to do. Now I'm not going to hold our breath that that's going to happen, but especially, like in the R&D space, that would really help innovation. Yeah, so it would help your clients, because if they can get a little bit of cash back, because if you're doing a whole bunch of real estate projects, then these tax credits won't help you immediately. They'll help you down the road because they last almost forever. So these are the things that we're talking to Capitol Hill about. So we hope it's wire over the rock, which means eventually we'll get them to come around awesome.
Speaker 1:okay, so you know this is. This is a really cool topic when you can really dive deep into these opportunities. And nor for your advisors is you need someone who's really strategic with you as a CPA or a tax team. If you're just paying a guy to tell you what you owe at the end of the year, you know you have a 1040 factory, which is fine in many circumstances You're not going to see this type of opportunity. You really need someone strategic and educated and specialized in tax planning who can help facilitate these relationships and identify these opportunities here. So, obviously, if anyone listening, if you or anyone you know is interested in our services, go to prosperalcpacom, slash apply or slash recruiting If you know someone wants to join our team, because we're always looking for really bright and fantastic people. Rick and Steve, can you tell us? Give me a call to action here if you want to learn more and contact you guys directly?
Speaker 2:I dropped a link in the chat to schedule either a 45L or R&D assessment.
Speaker 1:If anyone wants to evaluate this further, great, all right, and we'll put that in the show notes and on the YouTube page as well. I really appreciate your time. Stay tuned for some more great content coming your way and thanks for listening. All right, thanks, mark.
Speaker 2:Thanks, Mark.