Article
Section 45L: Everything old is new again
Jun 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.
The largest 45L credit must meet the “prevailing wage” standard. Those who have received HUD financing already abide by that standard. Certain state financing also requires homebuilders to follow Davis-Bacon Act prevailing wage stipulations. Combining the Energy STAR Multifamily New Construction National Program requirement and prevailing wage multiplies the $500 credit by 5 times to a credit of $2,500 per unit. If ZERH requirements are met, the $1,000 per unit credit increases 5 times to $5,000 per unit.
Single family and manufactured homes are eligible for a $2,500 credit per unit without the prevailing wage requirements. For 2023 – 2024, the base credit threshold requires the units to be certified under the Energy STAR v3.1 energy-efficient home program as applicable to the building location. Certified units will yield a $2,500 credit per unit. For 2025 – 2032, the base credit threshold requires the units to be certified under the Energy STAR v3.2 energy-efficient home program as applicable to the building location. Single family and manufactured homes are also eligible to double the tax credit for ZERH certification, which elevates the credit to $5,000 per dwelling.
It is worth noting that the certification is a complex process. The certifier must be accredited or authorized by the Residential Energy Services Network (RESNET) or an equivalent rating network. The process involves multiple inspections throughout construction and once home construction is complete, no Energy Star program can be retroactively certified. Thus, developers interested in this credit must initially incorporate the energy efficiency components and inspection process into their business model. Conveniently, the net-zero and Energy Star certifications can be performed simultaneously. These certifications fulfill substantiation to claim the tax credits when filing the tax return.
Further changes and benefits
A significant change in the IRA for affordable housing projects is that it doesn’t preclude taxpayers who qualify for 45L from also claiming other credits, including the low-income housing tax credit (LIHTC). Instead, they can combine credits without impacting the calculation of the LIHTC. Under pre-IRA rules, an energy-efficient home was limited to a building of three stories or less. Now that the certification process is based on Energy STAR rules, there are no building story limitations under Energy STAR.
The IRA is also extending the 45L deadline to the end of 2032. Since its inception, 45L has gone through a cycle of expiration and renewal multiple times, giving it a feeling of impermanence. Contractors were never certain if it would be around when they needed it. The new deadline will allow more homebuilders to plan accordingly should they want to use it.
While IRA allowed some credits to be sold if the holder didn’t need them, this is not the case with 45L.
Considerations
Affordable housing project owners should be considering how or if they qualify for 45L. For those in the early stages, now is the time to integrate energy-efficient elements into their plans. If a project was recently completed, the developer should talk with a real estate tax professional to determine whether that project qualifies for the credit. And even though buildings over three stories don’t yet qualify, they may want to proceed like they do in case anticipated guidance expands the credit to those types of buildings. Regardless, the rewritten section 45L is well suited for affordable housing projects and should be a part of conversations for any multifamily project that uses HUD or state financing that requires prevailing wage standards.
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
