Tax Benefits for Green Homes: ENERGY STAR vs. ZERH

The landscape of residential construction is shifting significantly towards energy efficiency, especially now that the federal government has upgraded a powerful tax benefit program to drive this change: the §45L tax credit. 

This credit offers substantial advantages for developers constructing homes that meet specific energy-efficient standards. Let’s understand how green home developers can maximize §45L tax benefit by understanding the difference between the two leading certifications: ENERGY STAR and Zero Energy Ready Homes (ZERH).

The Power of §45L: Fueling Energy-Efficient Construction

The Inflation Reduction Act 2022 revitalized the Section §45L tax credit, extending it through 2032 and enhancing its potential benefits. This credit rewards developers constructing new homes that meet specific energy-efficient benchmarks. The credit amount varies depending on the level of energy efficiency achieved, offering a significant incentive to prioritize sustainable construction practices.

With §45L Energy Efficient Credit, developers with eligible projects can claim a credit of $500 to $5,000 per qualifying dwelling unit for meeting specific energy efficiency standards, including requirements for heating, cooling, ventilation, and building envelope components.

Criteria and Requirements for ENERGY STAR Certification:

For a home to receive the ENERGY STAR certification, it must meet several strict requirements that include:

• Energy-smart construction reduces energy loss by using high-performance windows and doors and well-insulated walls, ceilings, and floors. Air sealing measures are also essential to minimize leaks and drafts.
• Efficient HVAC systems: High-efficiency rating (SEER, HSPF) heating and cooling equipment installed and sized correctly contribute to overall energy savings.
• Water conservation: Installing fixtures with the WaterSense logo reduces water use.
• High-quality appliances and lighting: A large percentage of light fixtures and appliances need to be ENERGY STAR-rated.

ENERGY STAR-certified homes typically achieve a 10-15% improvement in energy efficiency compared to standard homes. Qualifying builders and developers who construct these homes for a tax credit under the §45L program. The specific tax credit amount hinges on the version of the ENERGY STAR program requirements met at the time of acquisition.

Zero Energy Ready Homes (ZERH): A Step Towards Net Zero

The ZERH program, administered by the Department of Energy (DOE), goes beyond mere energy efficiency, aiming for homes that are exceptionally energy-efficient and close to achieving net zero energy consumption. Significant §45L credits are unlocked by a ZERH-certified home’s increased energy savings.

ZERH Certification Requirements:

ZERH certification has more stringent requirements compared to ENERGY STAR. These key areas define a ZERH home:

• Ultra-Efficient Building Envelope: ZERH homes prioritize superior insulation materials, meticulous air sealing measures, and high-performance windows to minimize energy losses.
• Renewable Energy Integration: ZERH homes often incorporate renewable energy sources like solar panels or geothermal systems to offset energy consumption and potentially achieve net zero energy use.
• High-Efficiency HVAC Systems: Like ENERGY STAR, ZERH prioritizes high-efficiency HVAC systems with advanced features like variable-speed drives and energy recovery ventilation (ERV) systems. 
• Building Envelope Testing and Verification: ZERH certification involves rigorous building envelope testing to meet stringent air leakage and thermal performance standards.

ZERH or ENERGY STAR?

Choosing between ENERGY STAR and ZERH certifications involves weighing the potential tax benefits against the upfront costs and complexity of achieving each standard. Here’s a breakdown for clarity:

• ZERH buildings have better insulation, more sophisticated HVAC systems, and more stringent construction methods than ENERGY STAR homes; their initial construction costs are typically higher.
• Some of those upfront costs are mitigated by ZERH’s much greater 45L tax credit ($5,000 per eligible residence).
• Compared to merely ENERGY STAR, ZERH homes frequently result in almost zero energy expenses, meaning that over the course of the home’s lifetime, savings are significantly larger.
• ZERH may be more desirable in areas where purchasers prioritize sustainability and ultimate efficiency, but both certifications can increase resale value.

Other necessary considerations

Type	Qualification	Prevailing Wage Requirements	2022 (and before)	2023 (and onward)
Single Family	Energy Star	No	$2,000	$2,500
	ZERH	No	–	$5,000
Manufactured Homes	Energy Star	No	$1,000	$2,500
	ZERH	No	–	$5,000
Multi-Family Homes	Energy Star	No	$2,000	$500
	ZERH	No	–	$1,000
Multi-Family Homes	Energy Star	Yes	–	$2,500
	ZERH	Yes	–	$5,000

How Walker Reid Can Help You Navigate the Green Path

At Walker Reid, we understand the complexities of navigating green building certifications and maximizing the §45L tax credit benefits. Our team of experienced engineers can be your partner in achieving your energy-efficient construction goals, whether you’re aiming for ENERGY STAR or ZERH certification.

By partnering with Walker Reid, you gain access to a wealth of experience and expertise in green building practices. We are committed to helping you build a sustainable future, one energy-efficient home at a time.