Key Takeaways:
- The Section 179D deduction offers substantial tax savings for real estate owners and designers who incorporate energy-efficient systems into their projects.
- The One Big Beautiful Bill Act (OBBBA) introduced a 2026 sunset date for 179D, creating urgency for qualifying projects.
- Accelerating construction timelines and proper planning can help you capitalize on 179D before the deduction phases out.
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If you own, develop, or design commercial real estate, Section 179D has likely been one of the most valuable tax tools at your disposal. Officially called the Energy Efficient Commercial Building Property Deduction, 179D rewards you for incorporating features that reduce energy and power costs by at least 25%.
The deduction is tied to both a dollar rate and the building’s square footage. If construction starts before January 30, 2026, you could claim up to $5.81 per square foot. For larger properties — like office complexes, warehouses, or hotels — the savings can add up quickly.
Importantly, 179D is not limited to property owners. Architects, engineers, and contractors who design government or nonprofit buildings are also eligible. With an allocation letter from the building owner, designers can claim the deduction directly. That makes 179D a powerful incentive for multiple parties in the real estate ecosystem.
What’s Changed Under the OBBBA
The One Big Beautiful Bill Act (OBBBA) introduced a major change: a 2026 sunset for 179D. Projects must begin construction on or before June 30, 2026, to qualify. The placed-in-service date can occur later. This means time is of the essence. If you are considering energy-efficient upgrades or new builds, accelerating your project could mean capturing deductions worth hundreds of thousands — or even millions — before the door closes.
In addition, other OBBBA changes to the R&D expensing and bonus depreciation open up complementary planning opportunities. Used strategically, these tools can significantly reduce your tax burden and improve cash flow.
How “Start of Construction” Is Determined
To qualify before the June 30, 2026 cutoff, your project must meet the IRS definition of “start of construction.” There are two ways to satisfy this requirement: the Physical Work Test or the 5% Safe Harbor Test.
1. Physical Work Test
A project qualifies once meaningful physical work begins. Examples that typically qualify include:
- Excavating for the foundation
- Setting anchor bolts
- Pouring concrete pads
Activities that generally do not qualify include planning and design work, permitting, environmental studies, financing steps, or site clearing. These preparatory tasks do not count toward starting construction.
2. The 5% Safe Harbor Test
Alternatively, you can qualify by incurring at least 5% of the total project cost before June 30, 2026. This test relies on dated invoices, binding written contracts, and other financial records that substantiate when costs were actually incurred.
Why Documentation Matters
The IRS requires clear substantiation to support the start-of-construction date, particularly when meeting a hard deadline. Proper documentation — including contracts, logs, invoices, and evidence of physical work — is critical. Working with an experienced advisor can help you compile the right records and avoid timing missteps that jeopardize eligibility.
Who Qualifies for 179D?
You may be eligible if you fall into one of these groups:
- Owners of qualified commercial or multifamily residential buildings taller than four stories and larger than 10,000 square feet.
- Designers of government, nonprofit, or Tribal buildings: This includes architects, engineers, design-build contractors, and certain consultants — as long as they create the technical specifications for energy-efficient property.
- Retrofit projects meeting the energy usage intensity requirements after one year of service.
Common qualifying projects include upgrades to lighting, HVAC, building envelopes, insulation, and windows. K-12 schools, hospitals, sports arenas, and convention centers are prime candidates.
A Real-World Example of 179D in Action
Consider the experience of a Colorado-based design-build firm specializing in government projects. While the company regularly implemented energy-efficient features, it assumed those tax benefits only applied to owners.
With guidance, the firm learned it could claim 179D as the primary designer. After a certification process, it captured about $250,000 in deductions — funds it reinvested into future projects. Beyond the immediate impact, the firm unlocked an ongoing strategy for savings on similar work.
This case illustrates the hidden opportunities of 179D. Even if you don’t own a building, you may still benefit if your role in the design process qualifies.
How This Impacts You
The upcoming sunset means you have a limited window to act. If you are planning new construction or major improvements, starting sooner could lock in valuable deductions. Even if you don’t own the property, as a designer or contractor you may still qualify — but only if you secure the proper allocation letter from the building owner.
Waiting too long risks missing out entirely. With the scale of potential savings, 179D can materially impact your profitability, project bids, and long-term strategy.
How MGO Can Help
Our Tax Credits and Incentives team helps real estate owners, developers, and designers capture the full value of available tax incentives. Our team can assess your project’s eligibility, guide you through the certification process, and integrate 179D with other tax planning opportunities.
Talk to our professionals today to secure your deduction before the 2026 sunset and strengthen your financial position.