Real estate investing can be an exciting yet complex venture. As an investor, staying up to date on the latest tax credits and incentives available to you is crucial for maximizing returns. Two tax credits on the radar of many real estate investors today are the 45L Energy-Efficient Home Tax Credit and the Low-Income Housing Tax Credit (LIHTC).
Whether you are a seasoned real estate investor or just starting out, understanding how to capitalize on these credits is key to supercharging your investment strategy. So, let’s break down exactly how these programs work, their specific requirements, their recent updates and strategies to make the most of their financial benefits.
Unraveling 45L Credits
The 45L Energy-Efficient Home Tax Credit is a federal incentive that rewards the construction of energy-efficient residential properties. Developers, builders and homeowners can claim this credit for newly built or significantly remodeled properties. The credit covers a wide range of properties, including single-family homes and multifamily buildings.
The Inflation Reduction Act of 2022 made the 45L credit even more valuable. It increased the maximum credit from $2,000 to $5,000 per unit, incorporated labor standards and introduced the Zero Energy Ready Home (ZERH) program. The certification model now follows ENERGY STAR standards, eliminating the former height restriction on multifamily buildings.
A key update for Low-Income Housing Tax Credits (LIHTCs) is that any 45L credit claimed will no longer decrease the adjusted basis of LIHTC-backed buildings. In short, it is now possible to claim both 45L credits and LIHTCs on the same building.
To qualify for the 45L credit, residential and mixed-use buildings must secure an ENERGY STAR certification and, if possible, the additional ZERH certification for the maximum credit. For mixed-use properties, dwelling units and common areas (excluding parking garages) should constitute over 50% of the building’s total area.
The 45L credit value is determined on a per-unit basis, based on the per-unit’s first sale or lease date. Starting from 2023, the 45L credit is available in varying amounts for different property types. The per-unit credit value will also change based on the energy-savings requirements each unit satisfies (ENERGY STAR or ZERH). Additionally, developers of multifamily properties can earn higher credits by meeting prevailing wage requirements.
Case Study: Achieving 45L Tax Credit Success in Florida
An apartment complex in Florida, built using energy-efficient materials and methods, satisfied the requirements for the 45L tax incentive. Engineered Tax Services (ETS) executed an energy evaluation and assisted investors in claiming a total of $410,000 in tax credits. This case illustrates the substantial financial benefits achievable through the strategic use of energy tax incentives.
Decoding Low-Income Housing Tax Credits (LIHTCs)
The Low-Income Housing Tax Credit (LIHTC) is another potent incentive for real estate developers. This federal program encourages the development of affordable housing by offering tax credits to developers who reserve a portion of their units for low-income residents.
To qualify for LIHTCs, developers must meet specific criteria related to the income levels of residents and the affordability of rents. In return, they can claim a substantial tax credit each year for ten years.
The benefits of LIHTCs can be transformative. By reducing tax liability, these credits can render affordable housing projects financially viable, resulting in a profitable venture and a positive community impact.
The Connection Between 45L Credits and LIHTCs
Understanding the link between 45L credits and LIHTCs can offer significant advantages for developers and investors. These two distinct tax incentives can be used together to maximize a project's financial benefits, especially for those involved in affordable, energy-efficient housing projects.
Financial Upsides
Combining these tax credits opens the door to immense financial perks. The 45L credit could offer up to $5,000 per eligible unit. For large-scale developments, that’s an advantage that can stack up swiftly. LIHTCs, meanwhile, present a considerable annual tax credit for up to a decade, propelling affordable housing projects into realms of greater financial feasibility.
The Allure for Investors
Further, applying both credits simultaneously can enhance your project's appeal to investors and lenders. The integration of both credits can substantially amplify the project's return on investment, shaping it into a more attractive proposition.
Navigating the Tax Credit Maze
Unfortunately, the world of real estate tax credits can be a maze. Decoding it demands a comprehensive grasp of the tax code, the specifics of each credit's requirements and the claiming procedures. That's precisely where a trusted advisor like ETS steps in. Our expertise lies in helping developers and investors get the best out of tax credits like 45L and LIHTCs, guiding you through the labyrinthine process to make the most of these significant incentives.
Here's How We Can Help
We at ETS are specialists in steering developers and investors through the intricate landscape of tax credits. Our expert team has a wealth of experience with 45L credits and LIHTCs, and we know the ins and outs of maximizing these programs' advantages.
We deliver a broad range of services, from conducting initial viability analyses to preparing all the paperwork necessary for claiming your credits. Our clients have successfully earned millions of dollars in tax credits, enhancing their projects' profitability while driving economic growth and community development.
Final Thoughts
Gaining a thorough understanding of tax credits like the 45L and LIHTC can transform your real estate development or investment strategy. These incentives can significantly increase your projects' profitability, making them highly attractive to investors and lenders. With a knowledgeable ally like Engineered Tax Services by your side, you can traverse these complex programs and optimize your return on investment.
Ready to discover more about how 45L credits and LIHTCs can supercharge your projects? Get in touch with ETS today for a consultation. Our expert team is ready and eager to help you explore these programs.
