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45L Energy Efficient Tax Credits
What is the 45L Tax Credit?
Section 45L of the Internal Revenue Code (IRC) allows developers, builders and homeowners to claim tax credits for energy-efficient residential properties that are newly built or substantially remodeled. A broad range of single-family homes and multifamily properties are eligible for this tax credit, which has recently been extended through 2032.
Engineered Tax Services (ETS) has helped numerous property owners obtain valuable tax credits by complying with all IRS qualification and certification standards. If you have questions regarding the 45L tax credit, we would be happy to offer our guidance and expertise.
Inflation Reduction Act Update
Having existed since 2006, the 45L Energy-Efficient Home Tax Credit was recently expanded under the Inflation Reduction Act of 2022 (IRA). The maximum available credit was increased from $2,000 to $5,000 per unit with the addition of labor standards and the Zero Energy Ready Home (ZERH) program. The certification model has likewise shifted to ENERGY STAR. Because of this, the height limitation on multifamily buildings was removed.
Another exciting change to the 45L program is an update for Low-Income Housing Tax Credits (LIHTCs). Any 45L credit amounts claimed no longer reduce the adjusted basis of buildings supported by LIHTCs, which means that it is now possible to claim both 45L credits and LIHTCs on the same building.
What Are the Requirements?
The purpose of Section 45L is to encourage builders to use energy-efficient materials for the construction of residential buildings. Eligible properties do not necessarily have to be newly built homes; residential properties that have been substantially improved via remodeling or renovations are also eligible.
Prior to the IRA coming into effect in 2023, qualifying residential dwellings are required to consume 50% less heating and cooling energy than a comparable structure built in accordance with 2006 International Energy Conservation Code (IECC) standards. Additionally, the building envelope itself should account for at least one-fifth of the energy-saving improvements. The building must be certified by an independent certifier, who is required to be authorized by a rating network like the Residential Energy Services Network (RESNET).
2023 and Later
Beginning in 2023, residential and mixed-use buildings must obtain either ENERGY STAR or ZERH certification in order to qualify for the 45L tax credit. They must also meet both national and regional requirements set by the U.S. Environmental Protection Agency (EPA).
For mixed-use properties, dwelling units and common areas (excluding parking garages) must make up more than 50% of the building’s total square footage.
What Are the Prevailing Wage Requirements?
Beginning in the 2023 tax year, qualified contractors for multifamily properties have the option of claiming higher 45L tax credits if they abide by prevailing wage requirements. “Prevailing wage” refers to the average wage a specific type of worker can expect to earn in a specific region. Taxpayers wishing to obtain the 45L credit bonus rate must ensure that all workers involved in the multifamily construction project earn income that meets or exceeds the rate of prevailing wages.
What Types of Buildings Qualify?
- Single-family homes
- Apartment complexes (3 stories or less)
- Manufactured homes
2023 and Later
- Single-family homes
- Apartment complexes (any size)
- Manufactured homes
- Student housing (any size)
- Assisted living facilities (any size)
How Much Is the 45L Energy-Efficient Tax Credit Worth?
The value of the 45L credit is calculated on a unit-by-unit basis, based on the per-unit sale or lease date. This means that developers that undertake phased construction projects may need to claim their credits over the course of multiple years. You can only claim 45L credits for units that were sold or leased in the current tax year.
In tax years prior to 2023, the 45L credit is worth $2,000 per qualifying residential unit.
2023 and Later
Beginning in 2023, the 45L credit is available in different amounts for different property types. The value of the per-unit credit will also vary based on which energy-savings requirements each unit meets (ENERGY STAR or ZERH). Additionally, developers of multifamily properties can earn higher credits by meeting prevailing wage requirements.
|Energy Star with Prevailing Wages
|ZERH with Prevailing Wages
Who Can Claim 45L Tax Credits?
Only eligible contractors can claim the 45L credit. According to the IRS, the eligible contractor is the taxpayer that owns and has a basis in the residential building at the time of its construction.
Notably, there is no limit to the number of 45L tax credits each eligible contractor can claim. As long as the properties meet all requirements, you can claim tax credits for as many qualifying buildings as you own.
Get Help From Tax Credit Experts
Many residential buildings are eligible for the 45L Energy-Efficient Home Tax Credit, but not many homeowners, developers and builders know to take advantage of it. ETS is a trustworthy, IRS-compliant firm with an in-house team of licensed engineers and legal experts who are standing by to serve you. We provide 45L certifications that are evaluated, modeled and signed off on by authorized certifiers in good standing with the IRS.
Once certification is complete, you will receive a certification package with all necessary documentation to sustain the 45L tax credit in case of IRS audit. Whether you want to file for a single home or a large multifamily development, ETS has the tax expertise required to help you apply and qualify for this valuable tax credit.
Per the IRS, only the “eligible contractor” can claim this tax credit. This person is usually the developer, builder or homeowner. They must own and have a basis in the property at the time of its construction or improvement.
Yes. The 45L credit may be claimed retroactively for qualifying properties that were built or remodeled any time within the past three open tax years.
Pre-2023: Residential dwellings that surpass the 2006 IECC standards of energy efficiency are eligible for the 45L tax credit. The IRS defines a residential dwelling as a housing unit that has been designed for occupancy with one or more rooms, including a kitchen, a living room and a chamber for sleeping. The dwelling can be either a primary residence or a vacation home. Both single-family and multifamily properties can qualify, but it is important to note that the building must be no taller than three stories.
2023 and Later: Residential and mixed-use buildings are both eligible, but dwelling units and common spaces (excluding parking garages) must exceed 50% of the building’s square footage for mixed-use properties. The property can be multifamily or single-family, and there are no height requirements. The building must meet either ENERGY STAR or Zero Energy Ready Home (ZERH) energy-savings requirements.
Yes. Section 45L considers any property that has undergone substantial rehabilitation to be new construction. In addition to newly built homes, renovation or remodeling projects may also qualify for the 45L tax credit.
Pre-2023: A qualifying single-family home or multi-family property must consume 50% less heating and cooling energy than a comparable structure built in accordance with 2006 IECC standards. The building envelope itself (insulation, windows, doors, roof, foundation, etc.) must account for at least one-fifth of the energy-saving improvements.
2023 and Later: Buildings must meet either ENERGY STAR or Zero Energy Ready Home (ZERH) standards and be certified by an IRS-approved entity. To obtain ENERGY STAR certification, the building must perform better than at least 75% of similar buildings.
The eligible contractor (usually the developer, builder or homeowner) must obtain certification from an accredited, IRS-approved independent certifier. The independent certifier will conduct on-site verifications and computer modeling to create a certification package, which can then be used to file for the 45L tax credit.
No. Authorized and eligible certifiers are not permitted to check their own units. Eligible certifiers are likewise not allowed to check units belonging to family members. You must hire an independent third party (who has been properly accredited) to evaluate the property.
If you want to be eligible for the 45L tax credit, consider implementing:
- Double- or triple-pane window glass
- A hydronic heating system
- Reflective roofing
- An HVAC unit with a SEER rating of 13 or higher
- Exterior doors with extra insulation
- Insulation with high R-values
- A gas furnace system that runs at 80% efficiency or higher
- Additional foundation insulation
- Low-E vinyl windows
- Structural insulated panels
No. As long as your buildings meet all requirements, you can claim 45L tax credits for as many units as you own.
Yes. Unused 45L tax credits may be carried forward up to 20 years.
Eligible contractors may request a tax credit of up to $2,000 or $5,000 (depending on the circumstances) for energy-efficient residential dwellings that are either newly built or substantially renovated.
In order to claim the 45L tax credit, you must own and have a basis in a certified energy-efficient residential building during its construction. Individuals, trusts, estates, partnerships, associations, companies and corporations may claim the 45L credit on qualifying properties.
Pre-2023: Yes. Any deduction amount claimed under 45L will reduce the basis of buildings supported by Section 42 Low-Income Housing Tax Credits (LIHTCs).
2023 and Later: No. 45L credit amounts no longer reduce the adjusted basis of LIHTC-supported buildings.
Pre-2023: No. In order to be eligible for 179D, residential buildings must be at least four stories tall. To be eligible for 45L, residential buildings must be under three stories tall. It is not possible for a residential building to meet both of these height requirements at once.
2023 and Later: Yes. Because the 2023 update removes height restrictions for 45L, it is now possible to claim both 45L and 179D on residential buildings of four or more stories.
Pre-2023: 45L does not have prevailing wage provisions for tax years prior to 2023.
2023 and Later: Prevailing wages are the average wage a specific type of employee could expect to earn in a specific area. Due to differing costs of living, prevailing wages vary state-by-state and region-by-region. Official prevailing wages may be found at www.sam.gov. Taxpayers wishing to request prevailing wages for job titles and geographic locations not included on this site should email [email protected]. Further guidance regarding prevailing wage requirements is included in IRS Notice 2022-61.
No. There are no apprenticeship requirements or provisions for the 45L energy-efficient tax credit.
After undergoing a detailed energy analysis, eligible contractors should use IRS Form 8908 to claim a credit for each certified energy-efficient home first sold or leased during the tax year.
ETS can provide a complimentary engineering and tax analysis to determine if this benefit can be applied to your property. If so, we can provide all required certifications for you to claim the benefit in accordance with IRS regulations.
ETS works with CPA firms and business owners to coordinate energy analysis for the 45L tax credit. We offer in-house engineering capabilities and tax expertise to help you apply and qualify for this valuable tax credit.
Case Study: 45L Case Study on Apartments in North Carolina
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