45L Energy Efficient Home Credit

BACKGROUND

The Energy Efficient Home Credit, as established by the Energy Policy Act of 2005 and codified under §45L of the Internal Revenue Code, allows eligible developers to claim a $2,000 tax credit for each newly constructed or substantially reconstructed qualifying residence. Examples of housing for which this credit applies includes:

• Single Family Homes,
• Townhouses,
• Apartments,
• Condominiums,
• Assisted Living Homes, and
• Student Housing

The residence or building must not be more than three stories above grade in height. This incentive was extended by the “Consolidated Appropriations Act, 2021” and applies to residences sold or leased on or before December 31, 2021.

HOW IT WORKS

An eligible contractor must have constructed a qualified energy efficient home, as well as owned and have had a basis in the home during its construction. An eligible contractor may claim the credit for each home that qualifies for the credit if:

• It is located in the United States
• It meets certain energy saving requirements
• It is sold or leased on or before December 31, 2021 for use as a residence (the credit can be taken retroactively for 3 years back or to any open tax year)
• The residence or building must not be more than three stories above grade in height.

The §45L credit not only includes new construction, but reconstruction and rehabilitation projects. The incentive applies to single-family homes as well as condominiums, apartment complexes, and other multifamily residential buildings whereby each unit may qualify for a $2,000 credit.

ENERGY SAVING REQUIREMENTS

The §45L credit is $2,000 for a dwelling unit that is certified to have an annual level of heating and cooling energy consumption at least 50% below the annual level of heating and cooling energy consumption of a “comparable dwelling unit” and has building envelope component improvements that account for at least 1/5 of the 50% reduction in energy consumption.

A comparable dwelling unit:

• First, it must be constructed according to the standards of chapter 4 of the 2006 International Energy Conservation Code, including supplements, as in effect on January 1, 2006,
• Second, its heating and cooling equipment efficiencies must correspond to the minimum allowed by Department of Energy regulations under the National Appliance Energy Conservation Act of 1987 that are in effect when its construction is completed.

CLAIMING THE §45L CREDIT

Certification must be obtained to verify that the home satisfies specific energy efficiency requirements. Further, certification must be done using an independent, qualified individual to verify and certify that the property installed satisfies specific energy efficiency requirements using IRS-approved software. A site visit is required to verify installation of the energy efficient features. The tax credit is filed using IRS Form 8908, Energy Efficient Home Credit.

HOW WE CAN HELP

• Perform free assessments to pre-qualify the property
• Coordinate with your tax preparer to claim the credit
• Certify the energy efficiency, which may require:
• Review of construction documents;
• Site visits; and
• Discussions with building designers, project managers and related personnel.

CASE STUDY

A taxpayer constructed a 250 unit apartment community made substantial energy efficiency upgrades to the property, and at $2,000 per unit, earned a $500,000 §45L tax credit. The tax credit was used to offset many of the costs for the upgrades. The taxpayer touted having “Green Living” in its marketing materials and literature, which made the property more attractive to prospective tenants.