What is the 45L Tax Credit?
The 45L Tax Credit is equal to $2,000 per unit for qualified owner-occupied or rental dwelling units that meet certain energy-savings standards.
Construction or rehabilitation of a unit must be substantially completed after August 8, 2005 and the until sold or leased before the end of 2022. The tax credit is claimed by the developer (known as the Eligible Contractor) in the year in which the unit is occupied.
Qualifying properties are comprised of a dwelling unit or units. A dwelling unit is defined as one or more rooms including a kitchen and designed as a unit for occupancy by one family for the purpose of cooking, living and sleeping. In order to meet the requirements of Section 45L, it must also be 3 stories or less above grade and may include apartments, condominiums, assisted living facilities, student housing dwelling units, townhouses, and single family homes.
The $2,000 tax credit is achieved for “each” dwelling unit within the buildings.
Each unit must meet a level of energy efficiency that is higher than 2006 IECC standards. Many newer or rehabbed developments already exceed these standards based on recent energy standards and building codes. We recommend that any apartment or condominium project developed (new construction or rehabilitation) within the past four years to be evaluated for the 45L Tax Credit,
Who is the Eligible Contractor?
The 45L credit is available to an eligible contractor in the year the certified dwelling units are leased or sold. Previously, there was some confusion as to who qualifies as the eligible contractor with respect to the home. For the purposes of 45L, a person or company must own and have basis in the qualified energy efficient home during the construction to qualify as the eligible contractor with respect to the home. For example if a person hires a third party contractor to construct the home owns and has basis in the home during its construction, the person that hires the third party contractor is the eligible contractor and the third party contractor is not the eligible contractor.
An eligible contractor must obtain certification from an independent eligible certifier before claiming the energy home credit with respect to the dwelling unit. An eligible certifier is a person not related to the eligible contractor that has been accredited or otherwise authorized by the Residential Energy Services Network (RESNET) or an equivalent rating network. The certifier conducts computer modeling and on-site testing and prepares a certification package with declaration that under penalties of perjury the certifier believes that the facts presented in the certification are true, correct and complete. The fee for certification is typically charged on a per unit basis.
Changes coming under the Inflation Reduction Act of 2022 (Effective for energy-efficient commercial buildings placed in services after 1/1/2023)
The current version of §45L which includes a $2,000.00 per unit, has been extended for residential homes or apartments placed in service through December 31, 2022. This is a great opportunity to take advantage of any new homes built this year and will be the last year in which home and apartment builders and developers can take advantage of the current qualification guidelines. We highly recommend moving forward swiftly on any projects that were placed in service in 2022, as the qualification standards beyond 2022 will be much more difficult to qualify for.
The §45L Tax Credit was also extended through 2032, with major changes to the qualifying standards, set to begin in 2023. New homes certified under the ENERGY STAR Residential New Construction or the ENERGY STAR Manufactured New Homes programs sold or rented after December 31, 2022, will be eligible for a $2,500.00 tax credit. This credit jumps to $5,000.00 if the units are certified under the Zero Energy Ready Homes Program (ZER).
Dwellings certified under the ENERGY STAR Multifamily New Construction National Program will also be eligible for these benefits, including high-rise projects, though the amount of the credit will be reduced if Davis-Bacon’s prevailing wage requirements are not followed. These credits remain in effect through 2032.