Congress Extends Section 45L New Energy Efficient Home Credit

Section 1332 of the Energy Policy Act of 2005 initially created the Internal Revenue Code Section 45L Tax Credit for Energy Efficient Homebuilders, and the credit has been renewed consistently. This tax credit was created to incentivize residential homebuilders and multifamily developers to reduce energy consumption in newly constructed or substantially reconstructed or rehabilitated residences by offering a per dwelling unit tax credit.

The Section 45L Tax Credit expired in 2021 but was most recently renewed as part of the Inflation Reduction Act on August 16, 2022. The credit is retroactively available for projects placed in service dating back to 2022.  In addition, tax returns for years prior to 2022 and for which the statute of limitations is not closed may be amended to take advantage of the tax credit.  The inflation Reduction Act provides for new credit amounts and standard requirements for 2023 through 2032.

More details on the Energy Efficient Home Credit

The credit is available for new or substantially reconstructed or rehabilitated single-family homes, townhomes and qualifying apartment buildings. Prior to the Inflation Reduction Act the credit was limited to multi-family properties with three stories or less above grade. Guidance for this requirement has not yet been issued for years after 2022.  The credit results to a maximum of $5,000 (formerly $2,000) per qualified dwelling unit. The baseline credit breaks down into two different categories for single family and multi-family homes.

• Single-Family - $2,500 for Energy Star homes and $5,000 for Zero Energy Ready homes
• Multi-Family - $500 for Energy Star homes and $1,000 for Zero Energy Ready homes
  • Multi-Family can jump to the $2,500 and $5,000 levels of single-family homes but only if the property satisfies the new prevailing wage requirements

The credit amount is based on the extent to which each new energy efficient home meets the energy saving requirements as well as certain certification requirements.

Due to the increased energy efficiency standards and testing included in the Inflation Reduction Act, inspections required during the construction phase require builders and developers to prepare for certification at an earlier point in development.

How do I get approval for an Energy Efficient home?

Residential homebuilders and multifamily developers can claim the credit if they constructed the home and it was sold to or leased by any individual for use as a residence. An eligible contractor must obtain a certification that the unit meets the requirements of Section 45L(c) (as in effect before the Inflation Reduction Act) if the home was sold or leased before 2023.

The certification will be treated as compliant with 45L(c) if all construction was completed in a manner consistent with the design specifications provided to the eligible certifier and the certification contains all of the information required by Notice 2008-35.

For homes sold or leased after 2022, an eligible contractor must obtain any certification(s) the dwelling unit needs to meet the applicable program requirement(s) referred to in section 45L(c) before claiming the section 45L credit.

We Can Help

Real estate tax and accounting specialists from our national real estate practice have been working with developers to explore the option of utilizing the energy efficient home credit to unlock tax savings. Our real estate tax advisors monitor any changes to the 45L credit as well as any other legislation that may impact residential developers.

Using our extensive real estate expertise, we can evaluate the energy efficient home credit as an option for your firm by forecasting the projected tax savings as it applies to your entire portfolio of properties.