Expanded Tax Credit for Energy-Efficient Home Builders

In a significant boost to the construction industry and the green building movement, the IRS has updated its policies, providing eligible contractors with an expanded tax credit for building new energy-efficient homes. This change, part of the Inflation Reduction Act of 2022, could see builders receiving up to $5,000 per home, a substantial increase from previous incentives. This is a crucial development for contractors looking to expand into green building practices while maximizing financial benefits.

Credit requirements

To qualify for this tax credit, the project must meet the following criteria:
• Construction or substantial reconstruction of a qualified home
• Ownership and basis in the home during its construction
• Sale or rental of a home for residential use

Eligible homes include single-family residences, multi-family homes, and manufactured homes, subject to certain Energy Star program requirements. These homes must be in the U.S. and bought or rented for residential use, and they must meet energy-saving standards based on the home type and acquisition date.

Credit increase

Prior to 2023, the credit was set at $1,000 or $2,000 depending on whether the home met the 30 percent or 50 percent standard for energy consumption reduction compared to a comparable home.

From 2023 through 2032, the tax credit ranges from $500 to $5,000. The amount depends on the standards met, which include compliance with Energy Star requirements, Zero Energy Ready Home (ZERH) program requirements, and prevailing wage requirements.

Contractors must fulfill all requirements before claiming the credit. They should review the Instructions for Form 8908, Energy Efficient Home Credit, and submit this form with their tax return to claim the credit.

Note that homes must meet rigorous Energy Star program requirements set by the EPA. For modular homes, this involves plant certification, builder qualification, and compliance verification. These homes are only certified as Energy Star compliant after on-site inspection and verification by a third-party verifier.

The requirements also apply to manufactured homes built in a factory under the federal Manufactured Home Construction and Safety Standards (HUD Code). These homes must meet Energy Star requirements for energy efficiency.

Expansion creates opportunities

The expanded tax credit for builders of new energy-efficient homes under the Inflation Reduction Act offers a compelling incentive for the construction industry. It not only boosts the economic feasibility of constructing energy-efficient homes but also aligns with environmental sustainability goals.

For construction firms seeking to navigate these new opportunities, expert guidance is essential. We encourage you to reach out to our industry specialists for in-depth insights and assistance in leveraging this tax credit effectively and exploring how your construction projects can benefit from this significant tax incentive.

01/03/2024