If you’re rehabbing or building with greater energy efficiency in mind, there’s a tax credit that rewards you for it. The Section 45L New Energy Efficient Home Credit offsets the cost of building energy-efficient homes, apartment buildings, and other residential dwelling units, and it’s gotten a significant boost thanks to the Inflation Reduction Act.
What Is the 45L Credit?
The 45L credit has been in place since 2006 to encourage energy-efficient building. It expired at the end of 2021, but has been retroactively extended for 2022 through the end of 2032, creating meaningful benefits for multifamily developers and homebuilders. The credit allows the contractor who built the home to reduce their tax liability in the year the home is first leased or sold.
How Much Is the Credit Worth?
For 2022, the existing energy efficiency criteria and $2,000 tax credit per dwelling unit remain unchanged. Starting in 2023, the maximum credit increases significantly:
- Single family homes: $2,500 with Energy Star, $5,000 with Zero Energy Ready Home (ZERH)
- Manufactured homes: $2,500 with Energy Star, $5,000 with ZERH
- Multifamily (no prevailing wage): $500 with Energy Star, $1,000 with ZERH
- Multifamily (with prevailing wage): $2,500 with Energy Star, $5,000 with ZERH
Who Can Claim the Credit?
Only the taxpayer who develops or owns the property, and then sells, leases, or uses it for their business, is eligible for the credit. This doesn’t apply to primary residences.
What Qualifies?
Single family residences, apartment buildings, townhomes, condominiums, assisted living facilities, student housing, and other facilities designed for individual occupancy can all qualify. New construction or substantial renovation projects must meet energy star standards, and Section 45L defines new construction broadly enough to include substantial rehabilitation, so renovation and upgrade projects qualify too. An energy certification from an eligible certifier is required, involving both a field inspection and a projected energy consumption analysis. Basic specifications include an air conditioner with a SEER rating of at least 13, a Heat Pump SEER rating of 13, and a Heating Seasonal Performance Factor (HSPF) of 7.7, along with qualifying roof and wall insulation R-values and Low-E, double or triple pane windows.
How Do You Claim It?
The credit is claimed by filing Form 8908 with your timely filed return, or on an eligible amended return. Taxpayers generally have up to three years to amend prior returns. Keep in mind the credit reduces your basis in the property, which can affect the depreciation you’re able to take, so it’s worth planning alongside other tax strategies like bonus depreciation. Have questions about how the 45L credit could apply to your next project? Reach out to us anytime.
