The 179D deduction will not entirely derail office-to-residential conversions, but it tightens the limits. Projects that start before June 30, 2026, can still utilize § 179D. However, after this cutoff, conversions lose an energy-efficiency deduction, which narrows margins and prompts teams to consider other federal depreciation options and state/local incentives.
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What Is Section 179D?
For nearly two decades, Section 179D of the federal tax code helped make energy-efficient commercial building projects financially viable, including adaptive reuse conversions such as transforming older office space into multifamily housing. The deduction allowed up to $5.81 per square foot for qualifying improvements to HVAC, lighting, and building envelopes (costs that are often substantial when gut-rehabbing outdated office towers into residential units).
Who Benefited from 179D and How Did It Improve ROI?
In many cases, developers used the deduction not only to reduce their own tax liability, but also to attract capital by improving project ROI. For municipal or nonprofit building owners, designers, and contractors could be allocated the deduction directly, creating additional incentive for high-performance retrofits in public housing and mixed-income conversions.
What Changed in Section 179D and When?
The One Big Beautiful Bill Act (OBBBA), signed into law by President Trump on July 4, 2025, sunsets Section 179D for projects beginning construction after June 30, 2026. Conversions that start before that date remain eligible, but after the cutoff, the deduction disappears entirely for new work.
What’s the Short-Term Impact (Now–June 2026)?
The looming deadline is already driving a rush among developers, architects, and general contractors to advance office-to-residential projects so they can lock in eligibility for the deduction. For older office buildings, which often have inefficient mechanical systems, leaky windows, and outdated lighting, 179D could offset hundreds of thousands of dollars in upgrade costs.
With the clock ticking, teams are accelerating feasibility studies, design work, and permit applications. This is especially pressing in high-vacancy urban markets like New York, Chicago, and San Francisco, where office conversions are being pushed as part of downtown revitalization strategies. Missing the June 2026 start date could force developers to scale back energy-efficiency measures, undermining long-term operating savings and environmental performance.
How Will Conversion Economics Shift After 179D Ends?
After 179D’s repeal, the economics of adaptive reuse will become tighter. Conversions often face higher per-square-foot costs than new construction due to demolition, structural modifications, and complex building code compliance. Without the federal deduction to offset energy efficiency costs, some projects may be shelved or value-engineered toward less ambitious performance targets.
Specialized contractors (mechanical, electrical, plumbing, glazing) could see reduced demand for high-efficiency systems in conversion work, as developers weigh first-cost savings over lifecycle benefits. This shift could also slow progress toward municipal energy-reduction goals, especially in jurisdictions without strong local incentives.
How Could This Affect City Housing and Climate Goals?
The elimination of 179D comes at a time when many cities are counting on office-to-residential conversions to address both housing shortages and the blight of half-empty office districts. Energy-efficient retrofits are central to these plans because they lower long-term utility costs for residents, improve building comfort, and help cities meet carbon-reduction mandates.
Without federal support, more of the cost burden shifts to state and local programs. Cities with climate-aligned building codes may still require certain efficiency standards, but compliance will be more expensive, potentially limiting developers’ interest in conversions.
What Alternatives and Workarounds Remain for 179D?
While the repeal removes a major incentive, the OBBBA introduced other provisions that could be adapted for conversions, specifically:
- Permanent 100% Bonus Depreciation: Certain building systems and equipment installed as part of the conversion may qualify, allowing developers to expense these costs in year one.
- Expanded Section 179 Expensing: Now with higher caps, this can cover some HVAC, roofing, and envelope improvements, though not at the level of the 179D deduction.
- Qualified Production Property (QPP) Rules: While less directly applicable to office-to-residential conversions, mixed-use projects with manufacturing or production components may see some benefit.
Additionally, some states (e.g., New York, Colorado, and Massachusetts) offer their own energy-efficiency tax credits, grants, or low-interest financing programs that could partially offset the loss of 179D. If your conversion includes on-site solar, review current incentives: 2025 IRS Updates for Solar Tax Credits.
What Should Developers and Contractors Do Now?
Between now and June 2026, expect a surge in pre-conversion design and permitting activity; tight coordination is needed to meet start-date eligibility. After the 179D sunset, project budgets are likely to be leaner, with potential reductions in high-energy efficiency measures and greater reliance on local incentives. There may be a slowdown in office-to-residential conversions, though demand will be stronger in states offering robust incentives.
Bottom line: The repeal of Section 179D removes a valuable tool that has long supported energy-efficient office-to-residential conversions. While new federal depreciation provisions and local incentives can soften the blow, the change raises costs, compresses timelines, and could slow the pace of adaptive reuse at a time when many cities are relying on such projects to reinvigorate downtowns and expand housing supply.
How Do Surety Bonds Support Conversions as 179D Sunsets?
Bonds keep projects viable as margins tighten. Follow these steps below:
- Typical bonds: Bid, Performance, Payment, Maintenance/Warranty (where required)
- Pre-sunset: Tie permits/NTP/mobilization to the June 30, 2026, cutoff
- Post-sunset: Expect value engineering, lock lifecycle-cost alternates, and document scope changes
- What to send your surety: Capital stack & incentive assumptions, baseline schedule, long-lead items, and a commissioning plan
- Contract tips: include change-in-law, incentive-availability clauses, and base acceptance on testable commissioning
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Frequently Asked Questions
Are our conversions still eligible for 179D?
Yes. Projects that begin construction before June 30, 2026, remain eligible. New starts after that date won’t qualify.
Can designers/contractors claim 179D on public or nonprofit buildings?
Yes. On municipal/nonprofit projects, the deduction can be allocated to designers/contractors. Nail this down in the contract (allocation language, signer authority, scope covered).
How should we bid 2025–Q2 2026 opportunities?
- Include a milestone plan to meet the cutoff (permits, NTP, mobilization)
- Call out eligible efficiency scopes (HVAC/lighting/envelope)
- Provide an alternate (post-sunset) scope so owners see options
What federal tools remain once 179D sunsets?
Per the new law: 100% bonus depreciation, expanded Section 179 expensing, and limited QPP use in certain mixed-use cases. These primarily benefit owners, but you can help package eligible components.
Does the 179D repeal affect bonding?
Indirectly. Narrower margins and compressed schedules raise performance/payment risk. Share a milestone pack with your surety (budget, schedule, lead-times, incentive assumptions) at NTP and again at mechanical completion.
