The Inflation Reduction Act that was signed into law in August last year includes an extension of the 45L Energy Efficient tax credit, a federal tax incentive for builders of qualifying projects. 45L tax credits were retroactively extended for 2022 through the end of 2032, creating significant returns for multifamily developers and homebuilders if the building meets specific criteria.
What is the 45L tax credit?
Named for IRS Code Section 45L, this tax credit incentivizes builders, developers, and contractors to design and construct energy-efficient homes that use less energy, reduce greenhouse gas emissions, and help homeowners save money on their energy bills. Specifically, 45L provides builders and developers with $2,000-$5,000 in tax credits for each qualifying housing unit built or remodeled to certain energy-saving specifications.
For units sold or leased from January 1, 2023, through December 31, 2023, the Act also provides an even higher tax credit of $5,000 per dwelling unit for single-family homes and multifamily developments when they are certified as a DOE Zero Energy Ready Home (ZERH). Additionally, the energy efficiency criteria changed to align with Department of Energy programs for Energy Star and Zero Energy Ready Homes. As a result, all residential developments became eligible—previously, only low-rise residential developments were eligible.
What projects qualify for the 45L tax credit?
To qualify for the 45L tax credit, a dwelling unit, including single family homes (custom and tract), multi-family apartments and condominiums, additional dwelling units, assisted living facilities, student housing, and substantial reconstruction or rehabilitation, must be sold, leased, or rented out to qualify for the 45L tax credit and it must meet or exceed Energy Star 3.1 requirements. There are specific requirements by housing type:
Single Family Homes Benefits and Requirements
- $2,500 tax credit for single family homes certified as ENERGY STAR Single Family New Homes Program Version 3.1. (For homes acquired1 before January 1, 2025, and Version 3.2 thereafter).
- $5,000 tax credit for single family homes certified as DOE Zero Energy Ready Home (ZERH).
Manufactured Homes Benefits and Requirements
- $2,500 tax credit for manufactured homes certified as ENERGY STAR Manufactured Home National Program requirements.
- $5,000 tax credit for manufactured homes certified as DOE Zero Energy Ready Home (ZERH).
Multifamily Homes Benefits and Requirements
- $500 tax credit for multifamily homes constructed after 2020 and certified as ENERGY STAR Single Family New Homes Program. When constructed with prevailing wage, the credit increases to $2,500.
- $1,000 tax credit for multifamily homes certified as DOE Zero Energy Ready Home. When constructed with prevailing wage, the credit increases to $5,000.
Beginning in 2023, homes leased or sold as a residence within buildings higher than three stories also are eligible.
Who benefits from the 45L tax credit?
The credit benefits the qualified builder or developer directly, and indirectly benefits future owners and occupants of the housing through lower energy bills.
The 45L tax credit encourages builders to use energy-efficient construction materials. Some energy-efficient materials cost more, but the tax credit combined with increased equity in the construction project and lower energy bills for occupants have long-term benefits. The 45L tax credit helps contractors and developers build energy-efficient housing that’s more marketable, holds more value, and shields future residents from rising energy prices.
Unused 45L tax credits may be carried forward for up to 20 years by the builder or developer.
How to claim the 45L tax credit
The credit is claimed on the builder’s return for the year the home is sold or leased, and it can be used to offset the builder’s income tax liability. In some cases, the credit can also be transferred to the homebuyer or other third-party investors. Necessary certifications to verify that the property meets all required standards of energy efficiency must first be obtained from an independent, impartial, and qualified certifier making use of the latest, IRS-approved software.
Contact R&A to see if your project qualifies for $2,000-$5,000 per unit in energy-efficient tax credits.
About this Author
Nate is a trusted advisor for businesses and individuals, providing tax planning, compliance support, and accounting services. He also is certified as a Personal Financial Specialist which allows him to guide clients through the many challenges and phases of their career from start-up to retirement.