While most energy tax credits benefit taxpayers who own energy efficient improvements, certain credits are reserved for those who construct these improvements — such as real estate developers. Section 45L is one of those special credits that developers can use to their advantage. Thanks to the Inflation Reduction Act of 2022 (IRA), Sec. 45L now allows home developers to potentially receive up to a $5,000 tax credit per unit.
As with other energy tax credits, Sec. 45L is not new but has been improved under the IRA. These improvements, which are effective beginning after December 31, 2022, increased incentives and replaced some older requirements with more modern ones. Developers need to understand the intricacies of these changes when evaluating the credit and should revisit whether opportunities exist.
What is Section 45L?
Sec. 45L provides a credit for new energy efficient homes sold for residential use by eligible contractors. To qualify, homes must be in the U.S. and meet energy savings thresholds. The amount of the credit depends on the type of dwelling, the level of energy efficiency provided and whether the housing unit meets prevailing wage requirements.
||Single Family Homes
|Energy Star Requirements
|Energy Star Requirements + Prevailing Wage Requirements
|Zero Energy Ready Home Program
|Zero Energy Ready Home Program + Prevailing Wage Requirements
How are Thresholds Met for Section 45L Credits?
The Energy Star and Zero Energy Ready Homes programs have similar goals — to construct homes that are more energy efficient than the average home built to code. However, the degree of energy efficiency will determine which program under revised Sec. 45L you qualify for and the resulting credit you could receive.
- Energy Star generally requires homes to be at least a specific percentage more energy efficient than a baseline home.
- Zero Energy Ready Homes is a new program that requires a home to be of such high performance level that a renewable energy system could offset most or all of the home’s annual energy use.
Both programs have extensive requirement checklists and must be certified by third-party inspectors. Additionally, both programs are scheduled to evolve over time, adding new and/or higher requirements for homes to qualify.
What Else Changed Under the IRA?
In addition to adding a new credit amount for Zero Energy Ready Homes, the IRA made a few other notable changes to the previous Sec. 45L credit:
- Increased the maximum credit available for meeting Energy Star certification from $2,000 per unit to $2,500 per unit.
- Added prevailing wage requirements for multi-family housing developers to achieve the highest credit rate.
- Removed a restriction that only allowed structures three stories or less to qualify — permitting mid- and high-rise projects to claim the credit.
Modeling is Key
As with many other energy tax credits, you will need to explore several factors when deciding if pursuing a Sec. 45L credit is right for you. Consider:
- Cost of energy efficient improvements
- Cost of paying prevailing wages (multi-family housing only)
- Cost of certifying with third-party
- Benefit of tax credit
- Benefit of increased development value
For certain developers, revised Sec. 45L will allow for significantly higher credit values than previously available. Developers should consider whether their projects are eligible for such credits, and meet with a tax adviser to further explore whether the credit is right for your business and customers.
Contact Justin Gartner at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.