Two Choices

The 179D deduction aims to motivate commercial building owners to pursue efficiency upgrades that reduce energy usage. The amount deducted is based on square footage and how much efficiency is improved over baseline standards. The 179D deduction will be discussed in the next blog post.

The 45L credit provides a dollar-for-dollar tax credit up to $5,000 for making new or existing homes more efficient. The exact credit amount depends on the energy standards each home meets.

45L

The 45L Energy Efficient Home Tax Credit, which was initially established in 2005, has been extended to encompass all new, qualified energy-efficient residences until 2032. The recent Inflation Reduction Act of 2022 (IRA) further amended Internal Revenue Code Section 45L, granting eligible contractors a tax credit for new or substantially reconstructed homes that satisfy the ENERGY STAR home program or Department of Energy Zero Energy Ready Home (DOE ZERH) program requirements. 

How It Works

In order to be eligible for the 45L tax credit, a qualified energy-efficient dwelling must be constructed by an eligible contractor, builder, developer, or owner.  

Dwellings that are completed and occupied by 2022 must be at least 50% more energy efficient than those that comply with the International Energy Conservation Code (IECC) 2006, with a minimum of 10% of the energy savings attributable to the building envelope's efficiency. A tax credit of $2,000 per residence or unit may be claimed provided that these prerequisites are satisfied. 

In order to qualify for a tax credit of up to $2,500 or $5,000, dwellings that have been completed and occupied as of 2023 must adhere to the ENERGY STAR or the DOE ZERH program requirements. 

What Qualifies?

• Single Family Homes

• Townhomes

• Condominiums

• Apartments

• Student Housing

• Assisted Living

Required Items for a Study

The property address and the number of units are basic pieces of information needed. Furthermore, it is necessary to provide building plans and information regarding HVAC systems, windows, insulation, and lighting. 

What is the impact of Section 45L on my tax return?

The 45L tax credit is a general business credit that can be used to offset tax on a dollar-for-dollar basis. It is asserted on tax form 8908. For instance, a tax credit of up to $425,000 may be available for an 85-unit assisted living facility that is completed and occupied in 2024. 

45L Energy Efficient Dwelling Unit Tax Credits

Tax credits of $5,000 per unit may be obtained by those who construct, renovate, own, or develop energy-efficient residential dwellings. 

In order to be eligible for the tax credit, eligible dwelling units must be certified to meet or exceed the necessary energy efficiency benchmarks and subsequently sold or leased. While the credit is applicable to single-family housing units, it can also be utilized for townhomes, condominiums, senior housing, and other types of property, provided that the property fulfills the necessary criteria. Fortunately, the energy-conscious building codes and efficiency standards of today may already qualify your properties. 

In order to capitalize on this cost-effective incentive, it is imperative to engage a RESNET-certified HERS Rater who is a qualified, third-party professional. This individual will be responsible for supplying the certification documents required to file for the available tax credit. 

Understanding the 45L Energy Efficient Residential Tax Credit

The federal government offered a substantial incentive for investors to construct energy-efficient homes under Title 26, U.S. Code § 45L, New Energy Efficient Home Credit. Rental properties and owner-occupied residences are both viable options for units. Nevertheless, the property must be sold, rented, or leased to a residential user during the tax year in which you wish to claim the credit.

The initiative was initially introduced in 2005. It has been extended for the past decade, most recently in December 2022, and will continue until the end of 2032. The initiative is retroactive for three years or for any open tax year that is on your books.

The value of this incentive can increase exponentially if you develop multi-unit dwellings, as it provides $5,000 in direct tax credit per certified unit. This is a direct reduction in your tax liability to the IRS, not a deduction, and is calculated on a dollar-for-dollar basis. For instance, a 150-unit complex could generate $300,000 in tax credits, with any unused portion being able to be carried over for a maximum of 20 years.

Properties Eligible for 45L Tax Credits

The following criteria are met by a qualified new energy-efficient home, which is defined as any dwelling unit within the United States, including townhomes, apartments, condos, dormitories, senior housing, and single-family homes:

Finished height of three floors or less if constructed and occupied before 2023, and Meets the energy savings, ENERGY STAR, or ZERH requirements Constructed and occupied during the last three tax years. 

In comparison to the IECC 2006, dwellings that are constructed, sold, or leased through 2022 must achieve energy savings that are 50% or less than those of a comparable unit, with the building envelope accounting for at least 10% of the energy savings. 

Full compliance with the ENERGY STAR or ZERH program requirements, which includes a mid-construction inspection, is required for dwellings that are constructed and sold or leased after 2022. 

It is crucial to acknowledge that properties that have undergone substantial reconstruction or renovation may be eligible for the 45L credit. Nevertheless, the energy efficiency, ENERGY STAR, or ZERH requirements may differ slightly in these circumstances. The most effective method of determining whether your property is eligible for the incentive is to consult with an experienced 45L certification provider. 

Conditions for Utilizing Tax Credits for Energy Efficiency

In order to qualify for the energy-efficient residence tax credit, you must submit a comprehensive project analysis and certification report with your application.

The report must be signed off by an eligible certifier, and the report provider must be a qualified, unrelated third-party entity.

A small investment is necessary to obtain the necessary analysis and certification, which typically entails a review of construction documents, a site visit, and a detailed analysis using sanctioned software.

Contact us today to learn more, or to request your free 45L energy-efficient dwelling tax credit pre-analysis.