Article

Section 45L: Everything old is new again

June 12, 2023 · Authored by Chad Resner, Donald N. Bernards, Robert Moczulewski

Content updated on Dec. 10, 2024

Section 45L, a longstanding energy efficiency credit that taxpayers have enjoyed since 2005, has expanded the credit amount under the Inflation Reduction Act (IRA). Homebuilders and developers, particularly those receiving Department of Housing and Urban Development (HUD) loans, may now qualify for enhanced benefits under the section 45L tax credit requirements.

The revised version of the 45L tax credit is available for newly built energy-efficient homes placed into service after Jan. 1, 2023, and before Dec. 31, 2032. The IRA bulked up eligibility requirements but also increased the benefits. The amount of credit per unit the taxpayer will receive depends on which requirements are satisfied. Although the base credit is $500 per unit, receiving up to $5,000 per unit is possible. Under the prior law, $2,000 per unit was the maximum credit a taxpayer could receive.

Eligibility and credit amounts

Homebuilders and developers constructing qualified multifamily homes may be eligible for the credit. This group also includes taxpayers who hire a third-party contractor to construct the building and then sell or lease it.

For a building to qualify, it must be located in the U.S. and construction or reconstruction and rehabilitation must be substantially completed after section 45L’s date of enactment. The critical component: It must satisfy the specified energy savings obligations.

For multifamily homes placed in service from 2023 to 2032, the base credit threshold requires the units to be certified under the Energy STAR Multifamily New Construction National Program (in effect starting Jan. 1, 2023, or three calendar years before acquiring the dwelling). Certified units will yield a $500 credit per unit. Since both the Energy STAR Multifamily New Construction National Program certification and the section 45L certification could cost up to $500 per unit, it may not make financial sense for most developers to pursue the credit.

The next 45L threshold increases to a $1,000 credit per unit. These units must meet the Energy STAR Multifamily New Construction National Program and the Zero Energy Ready Home (ZERH) program requirements. A ZERH fundamentally requires units to be constructed to allow for easy installation of solar energy, which results in net-zero energy consumption if renewable solar energy is operable.