What Does the Inflation Reduction Act Mean for Housing?

In August, Congress passed the Inflation Reduction Act (IRA)—a package including energy, health care, and tax provisions—through the budget reconciliation process without Republican support. The legislation is a scaled back version of the previously proposed Build Back Better Act, which included $150 billion in housing-related spending—none of which made it into the IRA.

However, the bill did include $369 billion for climate resilience and energy security programs, including provisions to promote energy efficiency and energy affordability in homes and to decarbonize buildings to meet greenhouse gas reduction goals.

Here are the key housing-related provisions in the legislation, which include $18 billion in federal grants as well as an estimated $36.5 billion in tax credits over ten years.

Grant Programs

Consumer home energy rebate programs for energy efficiency retrofits and electrification—$8.8 billion

The bill includes two Department of Energy (DOE) rebate programs:

• The Home Energy Performance-Based, Whole-House Rebates (HOMES) program provides $4.3 billion in rebates for home energy-saving retrofits—with up to $4,000 available for most homeowners and up to $8,000 available for households earning less than 80% of the area median income.
• The High-Efficiency Electric Home Rebate Program provides $4.5 billion for grants to states and Tribes to administer rebate programs for electric home appliances for low- and middle-income recipients (they must earn less than 150% the area median income). The program provides up to $14,000 per household including $8,000 for heat pumps, $1,750 for heat pump water heaters, and $840 for electric stoves, as well as rebates for improvements to electrical wiring.

Energy and water efficiency for affordable housing—$1 billion

The bill provides funding to the Department of Housing and Urban Development for a new grant program supporting climate efforts in affordable housing projects. The program is targeted to owners or sponsors of properties in the Section 8 project-based rental assistance program, Section 236 program, Section 202 housing for the elderly, and Section 811 housing for people with disabilities. Eligible activities include:

• Improve energy and water efficiency
• Enhance indoor air quality or sustainability
• Implement the use of zero-emission electricity generation, low-emission building materials or processes, energy storage, or building electrification strategies
• Improve climate resilience

Incentives for states and localities to update energy codes—$1 billion

This Department of Energy funding supports states and local governments seeking to implement energy codes that meet or exceed the latest International Energy Conservation Code (IECC) standards. $670 million of the funds will be made available to support the adoption of building codes that meet zero-energy standards.

Grants for Energy Efficiency Contractor Training—$200 million

This DOE grant program provides state energy offices with the resources to train contractors to carry out energy efficiency upgrades, including for homes.

Grants for clean energy technology in low-income and disadvantaged communities—$7 billion

The IRA includes $27 billion for the Greenhouse Gas Reduction Fund, a clean energy technology accelerator, to be administered by the EPA. $7 billion of this funding is dedicated to competitive grants for deploying (or helping to provide) clean energy technology, including home installments such as rooftop solar panels, in low-income and disadvantaged communities. States, local governments, and Tribes, as well as non-profit organizations, are eligible to apply for these grants.

Tax Provisions

Credits for residential clean energy and energy efficiency home improvements

The bill extends two tax credits for households:

• The Energy Efficiency Home Improvement Credit (commonly referred to as 25C) provides a 30% tax credit for home energy efficiency projects such as installing energy-efficient exterior windows and doors, conducting home energy audits, and installing heat pumps. The tax credit has a maximum of up to $1,200 annually for most projects, and up to $2,000 annually for heat pumps, biomass stoves, and boilers. According to the CBO, this would cost $5.9 billion in foregone tax revenue over five years and $12.5 billion over ten years.
• The Residential Clean Energy Credit (also known as 25D) provides a 30% tax credit for residential solar, wind, geothermal, and biomass fuel installments annually through 2032 and decreasing thereafter. According to CBO, this will cost $6.9 billion in foregone tax revenue over five years and $22 billion over ten years.

Credits to developers for new energy-efficient homes

The Energy Efficient Home Credit (also known as 45L), established in 2006, allows developers to claim tax credits for constructing new energy-efficient homes. The credit expired in 2021, but the IRA retroactively extends it through 2031, while also raising the credit from $2,000 to $5,000 per unit. The IRA establishes new energy efficiency standards for the credit and eliminates its height restriction. (Previously only buildings three stories or less were eligible for credits but now buildings of any height are eligible.) According to CBO, the credit would cost $887 million over five years and $2.0 billion over ten years.

Protecting the LIHTC basis

Importantly, the IRA includes provisions to ensure eligible entities claiming an energy credit and the Low-Income Housing Tax Credit do not have to reduce their LIHTC basis for credits claimed—meaning energy credits provided in the bill will not diminish the capacity for the LIHTC to increase the supply of affordable housing.

Conclusion

Now that the Inflation Reduction Act is law, housing policy stakeholders—including state and local governments, federal agencies, non-profit housing advocates, and community-based organizations—should work to make sure low-income Americans are able to take advantage of IRA programs to lower the costs of energy efficiency and cleaner energy use in their homes. However, the urgent need for ambitious housing legislation remains, as the effort throughout the 117th Congress to address housing affordability through the inherently partisan reconciliation process has failed to bear fruit. Moving forward, a bipartisan initiative that draws upon the best ideas of both parties is more likely to be successful at delivering durable results that improve housing affordability across the nation.