The Value of Energy-Efficient Design: The Section 179D Deduction

As commercial real estate faces rising operating costs and evolving sustainability mandates, shrewd real estate owners, operators, and investors are leveraging every available tool to enhance energy efficiency— and profitability, of their properties. One often overlooked, but highly valuable, tax incentive is the Section 179D deduction, also known as the energy-efficient commercial buildings deduction.

Originally enacted in 2005, Section 179D allows building owners and designers to claim deductions for energy-efficient improvements to HVAC, lighting, and building envelope systems. The Inflation Reduction Act of 2022 (IRA) has significantly expanded this deduction, making it more accessible than ever for commercial office buildings.

What changed under the Inflation Reduction Act?

The following are key changes to the Section 179D deduction under the IRA:

• The Section 179D deduction is $0.50 per square foot and can be increased by $0.02 for each percentage point by which the certified efficiency improvements reduce energy and power costs. There is a maximum deduction of $1.00 per square foot. The applicable dollar value is adjusted annually for inflation beginning in 2023.
• If the project meets the prevailing wage and apprenticeship requirements, the base amount increases to $2.50 per square foot, which potentially could be further increased by $0.10 for each percentage point increase in energy efficiency, with a maximum amount of $5.00 per square foot.
• A qualifying building must now increase its efficiency compared to the reference standard by 25%.
• Unlike the previous law, the Section 179D deduction can be allocated to designers of energy-efficient buildings for tax-exempt entities, rather than only for governmental entities.
• Real estate investment trusts (REITs) are able to better utilize the Section 179D deduction.

Office building owner boosts Section 179D deduction with CLA

Consider a real estate investment firm that owns a 250,000-square-foot Class A office building undergoing HVAC system modernization and LED lighting retrofits in 2024. By working with CLA to perform a Section 179D study and achieving compliance with prevailing wage standards, the firm qualified for a $3.00 per square foot deduction, resulting in a $750,000 deduction.

This deduction significantly reduced the firm’s taxable income, offset the capital improvement costs, and increased the building’s appeal to sustainability-conscious tenants. CLA aligned compliance and documentation with IRS standards, resulting in a seamless claim process and no unwanted surprises during cost segregation study preparation or tax return compliance filings.

The bottom line for real estate owners, operators, and investors

Section 179D is no longer a niche benefit — it is a mainstream, high-impact opportunity when making energy-efficient upgrades. Whether you're modernizing a portfolio of office buildings or retrofitting a single asset, it's worth evaluating how Section 179D can reduce your tax liability and improve return on investment.

How CLA can help

If you’re planning capital improvements or want to assess your building’s eligibility for Section 179D, let’s connect. CLA can help you evaluate your options and build a strategy that enhances your benefits while remaining compliant.