§45L for Builders of Energy Efficient Homes and Commercial Buildings
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Section §45L is a little-known tax credit that offers developers and project managers a means to offset the costs associated with building energy-efficient single-family or multifamily dwelling units and properties. Through the Inflation Reduction Act, Section §45L Tax Credit for Energy Efficient New Homes has been updated and extended through 2032.
The §45L credit provides a dollar-for-dollar offset against taxes owed or paid in the tax year in which the property is sold or leased. Homebuilders and developers of single-family homes and/or multifamily homes can benefit from the §45L Tax Credit.
What is the §45L Tax Credit?
The Internal Revenue Code (IRC) Section §45L is a $2,000 per dwelling unit ($1,000 for manufactured homes) tax credit for 2022 for each new energy-efficient home that is constructed by an eligible contractor and acquired by a person from the eligible contractor for use as a residence during the tax year. The credit can be taken on amended returns or carried forward for up to 20 years.
As of January 1, 2023, the credit increases to $5,000 per dwelling unit for single-family and manufactured homes. All residential developments will become eligible, as opposed to only low-rise residential developments being eligible in previous years. The energy-efficient homes must meet the criteria as outlined by ENERGY STAR.
The IRS requires that:
A §45L analysis is conducted by a certified third-party using IRS-approved modeling software.
A dwelling unit must be certified to provide a level of heating and cooling energy consumption that is at least 50 percent below that of a comparable dwelling unit constructed in accordance with the standards of either the 2003 IECC or 2006 IECC (depending on the year sold or leased).
It also must have building envelope component improvements that provide for a level of heating and cooling energy consumption that is at least 10 percent below that of a comparable dwelling unit.
Which Updates Have Been Made to the §45L Tax Credit?
Under the Inflation Reduction Act, homes and units that have been acquired after January 1, 2023, are eligible for a tax credit that is tied to the ENERGY STAR certification. This applies to single-family homes, multifamily homes, and manufactured homes. The updates include the following §45L tax increases when the criteria outlined by ENERGY STAR Residental New Construction Program or the Manufactured Homes Program are met.
Single-Family New Homes: Increased tax credit of $2,500 available for ENERGY STAR Certified Homes. Single-family homes must meet the ENERGY STAR Single Family New Homes Program version 3.1 when homes are constructed prior to January 1, 2025, and version 3.2 after this timeframe.
Manufactured Homes: Increased tax credit of $2,500 available for ENERGY STAR certified manufactured homes that meet the most recent ENERGY STAR Manufactured New Homes program requirements, which is currently version 2. Version 2.1 is expected to be implemented in May 2023.
Multifamily Homes: Increased tax credit of $500 for multifamily homes constructed after 2022 and when these homes meet the ENERGY STAR Multifamily New Construction National Program requirements (or regional program requirements).
Single-family and manufactured new homes can be eligible for up to $5,000 per dwelling unit.
Which Energy-Efficient Buildings Qualify for the §45L Tax Credit?
The following energy-efficient homes and buildings qualify for the §45L tax credit:
Residential Buildings Undergoing Remodeling (including family homes)
Assisted Living Facilities
Energy-Efficiency Dwelling Renovations That Qualify for the §45L Tax Credits
The following renovations qualify for homebuilders and developers to claim the energy-saving tax credits:
Windows with triple-panes and/or double-panes
Claiming the §45L Tax Credit For Past Properties
The Tax Increase Prevention Act of 2014 enables taxpayers to claim the energy-efficiency credit for dwelling units that have been built within the last three years. This includes renovations and new construction projects such as wall insulation, roof insulation, air conditioning, and many more.