Are you eligible for the expanded 45L energy-efficient home credit?
Since 2006, Internal Revenue Code Section 45L has provided a tax credit to eligible contractors who construct qualified, new, energy-efficient homes. Home builders, as well as owners of multifamily homes and apartment complexes, have been able to qualify for these new construction tax credits.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which expanded the 45L energy tax credit starting January 1, 2023. This expansion has significant implications for energy-efficient home builders and the residential construction industry.
Below is a direct comparison between the newly expanded Energy Efficient Home Credit and the previous version:
| New 26 U.S. Code § 45L tax credit | Previous 26 U.S. Code § 45L tax credit | |
|---|---|---|
| Effective date | January 1, 2023 | January 1, 2006 – December 31, 2022 |
| Eligibility |
For qualified single family and manufactured homes first acquired for use as a residence in 2023, the credit is: - $2,500, with Energy Star becoming the new base qualification standard. - $5,000, with the Zero Energy Ready Home (ZERH) qualification. For qualified multifamily units first acquired for use as a residence in 2023, the credit is: - $500 per unit with the Energy Star base qualification and potentially up to $2,500 if the taxpayer meets the additional prevailing wage requirement. - $1,000 per unit with the ZERH qualification and potentially up to $5,000 with the prevailing wage requirement. All residential developments are now potentially eligible, whereas under previous law, only low-rise residential developments were eligible. |
- Developers/owners and builders of energy-efficient homes, condos and apartment units can qualify. - Buildings must meet residential requirement and be three stories or fewer above grade. (Buildings more than three stories are eligible for 179D instead.) - Units must be sold or leased by December 31, 2022. - The credit must be claimed by the developer or homebuilder in the year the unit is occupied or sold. - For retroactive credits, an amended return/administrative adjustment request is required and must be filed within the three-year statute of limitations. |
| Tax deduction range | $500 – $5,000 tax credit | $2,000 or $1,000 per unit |
45L tax credit requirements
Since the qualification requirement, prevailing wage requirement and credit amounts can differ, here’s a summary of the new 45L credits rules:
| Home type | Qualification requirement |
Prevailing wage requirement |
Credit amount |
|---|---|---|---|
| Single family* | Energy Star certification | No | $2,500 |
| Single family* | ZERH | No | $5,000 |
| Manufactured home | Energy Star certification | No | $2,500 |
| Manufactured home | ZERH | No | $5,000 |
| Multifamily | Energy Star certification | No | $500 |
| Multifamily | ZERH | No | $1,000 |
| Multifamily | Energy Star certification | Yes | $2,500 |
| Multifamily | ZERH | Yes | $5,000 |
*Single family includes site-built and modular single-family homes, duplexes and townhomes.
With that in mind, let’s look at two examples of the 45L credit in action:
Example 1: Old 45L credit
During 2021, a new three-story apartment complex with 208 units is built and completely leased out. The following credit is available: $2,000 per unit for a $416,000 tax credit.
Example 2: Expanded 45L credit
In 2023, a new four-story apartment complex is built and completely leased with 208 units. The units also qualified for the Zero Energy Ready Home program and meet prevailing wage requirements. The following credit is available: $5,000 per unit for a $1,040,000 tax credit.
Looking to qualify for the Energy Efficient Home Credit?
Here’s a list of energy-efficient features and building envelope component improvements to consider:
- Wall insulation R-13 through R-19+
- Roof insulation R-38+
- Double- or triple-pane windows
- Low-E vinyl windows
- Insulated exterior doors
- Extra-insulated foundations and slabs
- Air conditioning with SEER rating of 13 – 18
- 80 – 95% efficiency gas furnaces
- 80% of lighting is ENERGY STAR certified
- Ventilation units are ENERGY STAR certified
- Programmable thermostat
How Wipfli can help
Wipfli can help you claim the 45L tax credit and navigate the energy saving requirements. We offer a complimentary preliminary analysis to determine whether your building qualifies for green building tax incentives. If it does, we can also provide the necessary certification study and assist with Form 8908 for claiming the credit.
For the latest IRS guidance on the 45L tax credit multifamily 2023 requirements and energy efficiency standards, refer to Notice 2023-65. This notice provides important information for home builders and developers looking to take advantage of these federal tax credits for energy-efficient homes and sustainable housing projects.
Remember, the 45L energy efficient home credit is designed to incentivize energy consumption reduction in residential construction. By meeting the Energy Star program requirements or achieving Zero Energy Ready Home certification, builders can significantly benefit from these new home construction tax credits in 2023 and beyond.
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