What is the Section 179D deduction and which real estate owners qualify?

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For property placed in service after December 31, 2022, qualifying property generally must be depreciable, installed on or in a building located in the United States, and installed as part of one of three building systems: interior lighting; heating, cooling, ventilation, and hot water systems; or the building envelope. The property also must be certified as part of a plan designed to reduce the building’s total annual energy and power costs for those systems by at least 25 percent compared with a reference building that meets the applicable ASHRAE Reference Standard 90.1. For most projects placed in service before 2027, the applicable reference standard remains ASHRAE 90.1-2007; for certain later projects, ASHRAE 90.1-2019 applies.

The deduction amount is not unlimited. Under §179D(b), the deduction for a building is capped by a square-foot formula that increases as certified energy savings increase. For 2026, the base amount ranges from $0.59 to $1.19 per square foot, and the increased amount ranges from $2.97 to $5.94 per square foot if prevailing wage and apprenticeship requirements are satisfied or if installation began before the applicable transition date.

Which real estate owners qualify?

The principal eligible taxpayers are owners of commercial buildings who place qualifying property in service. That includes owners of office buildings, industrial properties, retail buildings, hotels, hospitals, and other commercial real estate, assuming the building and the installed systems satisfy the statutory requirements. The rules also extend to certain multifamily buildings if they are commercial in character for this purpose and the property is depreciable. In addition, beginning in 2023, designers may claim the deduction for qualifying property installed in buildings owned by specified tax-exempt entities, including government entities, Indian tribal governments, Alaska Native Corporations, and tax-exempt organizations, but that is an allocation rule rather than owner eligibility.

Section 179D now also includes an alternative deduction for energy efficient building retrofit property. Under §179D(f), a taxpayer that elects this regime for a qualified building may claim a deduction tied to a written qualified retrofit plan expected to reduce the building’s energy use intensity by at least 25 percent. A qualified building for this purpose must be located in the United States and must have been originally placed in service at least five years before the retrofit plan is established. This makes the 179d energy efficient tax deduction especially relevant for owners upgrading older assets rather than only new construction.

From a broader tax perspective, this 179d tax incentive can be particularly valuable when paired with a building-level fixed asset review. For some owners, Cost Segregation may help identify the depreciable costs of qualifying systems, while §179D separately determines whether those systems generate an energy efficient commercial building deduction. In short, owners of U.S. commercial real estate who install qualifying lighting, HVAC, hot water, envelope, or retrofit improvements and satisfy the certification rules may be eligible for a meaningful current deduction under §179D.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Trey Webb, partner in charge of Bennett Thrasher’s Real Estate and Hospitality Tax Group, or call us at 770.396.2200.

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