Tax Credits Every Commercial Real Estate Investor Should Know

Created under the 2017 Tax Cuts and Jobs Act, Opportunity Zones (OZs) remain a cornerstone incentive for investors looking to pair tax efficiency with community development. By reinvesting capital gains into a Qualified Opportunity Fund, investors can defer federal taxes on those gains until either the asset is sold or the end of 2026, whichever comes first. In addition to the deferral, investors may reduce the tax owed on the original gain, and appreciation on the OZ investment itself can be entirely tax-free if the investment is held for 10 years. This makes OZs particularly effective for long-term development plays in emerging markets or distressed areas where both returns and community impact align.

New Markets Tax Credit (NMTC)

The New Markets Tax Credit was designed to encourage private capital investment in low-income communities. Allocations are awarded to Community Development Entities, which then use them to finance qualifying projects. Investors receive a credit equal to 39 percent of the qualified equity investment, claimed over a seven-year period.

NMTCs are often used in commercial developments, mixed-use projects, and community facilities such as healthcare centers or schools that would not otherwise attract sufficient private financing. The program is especially valuable for projects that generate both community benefits and financial returns, making it a critical piece of the capital stack in underserved markets.

Low-Income Housing Tax Credits (LIHTC)

Affordable housing development continues to rely heavily on the Low-Income Housing Tax Credits, the federal government’s largest and longest-running housing incentive. The program provides a dollar-for-dollar reduction in federal tax liability over a 10-year period, based on the cost of developing or rehabilitating affordable rental housing. In return, developers must commit to reserving a certain percentage of units for low-income tenants (based on area median income or AMI), typically for a 30-year compliance period.

LIHTCs remain the cornerstone of public-private partnerships in affordable housing and are frequently paired with other credits to make projects viable in difficult financial conditions. For developers working in high-cost environments, 4 percent or 9 percent bonds can often be the key to achieving feasibility.

Historic Tax Credits (HTCs)

Among the most powerful and unique incentives available to real estate investors are Historic Tax Credits, which apply exclusively to designated historic properties. At the federal level, HTCs can contribute 20 percent toward all qualifying rehabilitation costs. When paired with State HTCs, contributions can reach an additional 20 to 25 percent depending on the state. Together, these credits can offset as much as 40 to 45 percent of qualifying rehabilitation expenses, dramatically improving project viability.

HTCs are particularly valuable for bridging the gap between the high costs of rehabilitating historic properties—including addressing deficiencies, obsolescence, and preservation requirements—and the capital available. They can also be combined with other programs such as LIHTCs, NMTCs, Renewable Energy Tax Credits, Tax Increment Financing, and Opportunity Zone incentives, as well as federal, state, or local grants. This bundling creates highly attractive capital packages. It’s proven so successful that an entire submarket of investors and developers now specializes in pursuing historic buildings specifically for the HTC benefits.

Banks and institutional investors also frequently purchase HTCs to offset their tax liabilities, which provides liquidity to project sponsors. For developers, HTCs therefore not only reduce project costs but also free up capital earlier in the lifecycle, reducing risk and improving cash flow. For older properties without the historic designation, consult a historic architecture expert to evaluate whether pursuing the designation would be worthwhile.

Renewable Energy Tax Credits

Although OBBBA rolled back some clean energy incentives, the federal Renewable Energy Investment Tax Credits (ITCs) and Production Tax Credits (PTCs) are still available for qualified projects, especially those started prior to recent phaseouts. ITCs provide a percentage-based credit for installing renewable energy systems such as solar, wind, or geothermal, while PTCs offer credits based on renewable electricity generated per kilowatt-hour.

For real estate developers, renewable energy credits can reduce the upfront costs of incorporating sustainable systems into industrial, office, or mixed-use projects. They also help position projects as environmentally responsible investments – appealing to tenants, lenders, and institutional investors.

Other Tools Worth Considering

Beyond federal programs, developers often rely on Tax Increment Financing (TIFs), which allows future incremental tax revenues to fund upfront development costs. Many municipalities also provide grants, abatements, or local credits that can be layered with federal programs such as HOME funds, Housing Trust Funds (HTFs), and Community Development Block Grants (CDBGs) to create even more robust capital stacks. When combined thoughtfully, these tools can significantly enhance financial feasibility.

Maximizing Tax Credits for Your Deal

Tax credits can fill critical funding gaps and reduce the financing burden otherwise fulfilled by traditional, costly debt and equity sources. In today’s tighter lending climate, where banks are more cautious and construction costs remain elevated, understanding and deploying these credits can mean the difference between a project stalling or moving forward. With the variety of programs available, not to mention the recent changes in Federal programs, it makes sense to enlist the help of a consultant with experience in the complex requirements of tax credit programs. A qualified consultant can help identify the tax credit programs that fit your deal and provide application support as well as any assessments, benchmarking, or certifications that may be required.