Building a new home is an exciting endeavor, but it can also be a significant financial investment. Fortunately, the federal government offers a tax credit program incentivizing builders and developers to construct energy-efficient homes. This not only benefits the environment, but it can also put more money back in your pocket.
This article will guide you through the key aspects of the 45L tax credit, focusing specifically on how two prominent certifications—ENERGY STAR and Zero Energy Ready Home (ZERH)—influence the amount you can claim. By understanding the differences between these certifications and their impact on the credit, you can make informed decisions to maximize your project's value and tax advantages.
ENERGY STAR
The ENERGY STAR program, managed by the EPA, is a trusted symbol of energy efficiency. ENERGY STAR certified homes are designed and built to use less energy than standard code-built homes, leading to reductions in utility bills and a smaller environmental footprint.
45L Credit Amounts
For builders and developers, ENERGY STAR certification offers a pathway to qualify for 45L credit amounts of $2,500 for single-family homes and $500 per unit for multifamily properties. Higher credits of $2,500 per multifamily unit are also available when optional labor standards are met.
Requirements
To earn the coveted blue ENERGY STAR label, homes must satisfy a set of rigorous standards focusing on:
- Energy-smart construction: This includes well-insulated walls, ceilings and floors, along with high-performance windows and doors to minimize energy loss. Air sealing techniques are also crucial to reduce drafts and leaks.
- Efficient HVAC systems: Properly sized and installed heating and cooling equipment with high efficiency ratings (SEER, HSPF) contribute to overall energy savings.
- Water conservation: Installing WaterSense-labeled fixtures helps minimize water usage.
- Quality lighting and appliances: A significant portion of light fixtures must be ENERGY STAR qualified. Certain program versions may also require ENERGY STAR appliances.
ZERH
The Department of Energy's Zero Energy Ready Home (ZERH) program sets a significantly higher bar for energy performance than even ENERGY STAR. A ZERH-certified home is so energy-efficient that a renewable energy system could offset most or all of its annual energy consumption.
45L Credit Amounts
The heightened energy savings of a ZERH-certified home unlock substantial tax benefits. The specific 45L credit amounts available are listed in the table below:
| Property Type | Meeting Labor Standards | Not Meeting Labor Standars |
| Single-Family Home | $5,000 | $5,000 |
| Multifamily Property | $5,000 per Unit | $1,000 per unit |
Requirements
The ZERH program sets comprehensive and demanding requirements that extend beyond the ENERGY STAR program, including:
- Prerequisite ENERGY STAR certification: ZERH homes must first meet all of the relevant ENERGY STAR certification standards.
- Renewable energy ready: Roof design and structural capacity should accommodate potential installation of solar panels or other renewable energy systems.
- Exceptional efficiency: Even higher insulation levels, meticulous air sealing, and ultra-high-efficiency appliances and equipment are mandatory.
Choosing the Right Path
Choosing the right certification for your residential development requires balancing multiple factors. Let’s examine some of the most important considerations.
Cost vs. Benefit
- Upfront cost: ZERH homes generally incur higher initial building costs than ENERGY STAR homes due to premium insulation, advanced HVAC systems and more rigorous construction practices.
- Tax credit: ZERH's significantly higher 45L tax credit ($5,000 per eligible dwelling) helps offset some of those upfront costs.
- Long-term savings: ZERH homes often lead to near-zero energy bills, resulting in substantially greater savings over the lifetime of the home compared to just ENERGY STAR.
- Resale value: Both certifications can boost resale value, but ZERH might have a greater appeal in markets where buyers prioritize ultimate efficiency and sustainability.
Market Demand
ENERGY STAR is widely recognized and valued, catering to a broad buyer segment focused on energy savings and environmental consciousness. ZERH appeals to a more niche, eco-driven audience who seek the absolute cutting edge of efficiency. In areas with high energy costs or strong environmental policies, ZERH may gain more traction.
Practical Considerations
- Builder experience: ZERH demands a greater level of expertise and specialized resources from builders. Assess whether your team, contractors and suppliers are well-versed in the practices required for ZERH success.
- Time commitment: The ZERH certification process may be slightly longer than ENERGY STAR due to the additional modeling and verification requirements.
- Available raters: ZERH raters might be less common in some areas compared to ENERGY STAR raters.
Decision Factors: Ask Yourself
What are my budget constraints?
If your budget is tight, ENERGY STAR may be a more realistic starting point.
Who is my target buyer?
Will they value the extreme efficiency of ZERH enough to pay a premium, or does ENERGY STAR offer the right balance for your market?
How important is minimizing my environmental footprint?
ZERH aligns with the most ambitious sustainability goals.
Building a Greener Future With Tax Incentives
No matter your chosen path, constructing energy-efficient homes that qualify for the 45L tax credit is a savvy business move. It reduces your environmental impact, appeals to eco-conscious buyers and ultimately saves you money. The decision to build green is a wise investment in the future of our planet and your bottom line.
At Engineered Tax Services (ETS), we specialize in helping builders and developers like you navigate the 45L tax credit program. From determining eligibility to maximizing your claim, our team of tax experts can guide you through every step of the process. Contact ETS today for a free consultation. Let's discuss how we can help you achieve your green building goals and maximize your tax benefits.
