Posted by Robert Hancock on 04.28.23

The Inflation Reduction Act of 2022 (IRA) H.R. 5376, signed by President Biden August 16, 2022, will cut Americans’ energy costs, create jobs and transform U.S. efforts to address the climate crisis.

The Section 45L tax credit was substantially expanded and extended starting with the 2023 tax year, creating more tax saving opportunities for home builders and multifamily developers constructing energy efficient homes. The IRA expanded the credit to be as much as $5,000 per unit depending on what qualifications the property and developer meet upon implementation. The IRA also made larger multifamily developments eligible for the credit by removing the “three stories or less above grade” requirement. Originally, low-rise residential developments were the only ones eligible for this credit., it is now extended to homebuilders, single family or multi-family developers. The Act also extended the tax credit through the end of 2032, which eliminates the annual concerns of ”if” it will be extended.

In addition to the changes mentioned above, the IRA also specified how the credit is determined. Before the changes made in 2023, only a property’s energy efficient credentials directed how much tax credits could be claimed. The IRA now adds a few additional components to consider that can raise how much credit can be claimed. The original Energy Star qualification is still the main standard, but that is now the base level for the credit. The 45L now added the Zero Energy Ready and the Prevailing Wage qualifications into account when attempting to boost the credit claimed.

The key 45L provisions of the law include:

• Stricter energy efficiency rules and prevailing wage guidelines must be in place for taxpayers to claim the highest available tax credits.
• Property eligibility is expanded to include buildings that are more than three stories tall.
• For single-family and manufactured homes, 45L is increased to $2,500 and up to $5,000.
• Multi-family homes have several tax credit options depending on the level of energy efficiency and whether prevailing wage and apprenticeship rules are in place.
• Extension of the tax credit for ten years with a new expiration date of December 31, 2032. The existing language for the 45L tax credit was extended through December 31, 2022.

The tax credit amount will be changed as follows:

Single Family Homes Benefits and Requirements (Includes townhomes & duplexes)

• $2,500 tax credit for single family homes certified as ENERGY STAR Single Family New Homes Program Version 3.1. (For homes sold or leased up before January 1, 2025 and Version 3.2 thereafter).
• $5,000 tax credit for single family homes certified as DOE Zero Energy Ready Home (ZERH).

 Manufactured Homes Benefits and Requirements

• $2,500 tax credit for manufactured homes certified as ENERGY STAR Manufactured Home National Program requirements.
• $5,000 tax credit for manufactured homes certified as DOE Zero Energy Ready Home (ZERH).

 Multifamily Homes Benefits and Requirements

• $500 tax credit for multifamily homes constructed after 2022 and certified as ENERGY STAR Single Family New Homes Program. When constructed in accordance with the prevailing wage & apprenticeship requirements, the credit increases to $2,500.
• $1,000 tax credit for multifamily homes certified as DOE Zero Energy Ready Home. When constructed in accordance with the prevailing wage & apprenticeship requirements, the credit increases to $5,000.

 Energy efficient homes are slightly more expensive to build, however the savings in both tax incentives energy costs help to offset any upfront extra expenses. 45L is a significant part of cost planning for these projects, specifically since it’s been extended for ten years.

Builders can claim 45L for the year the project is in service, even if the credit can’t be used immediately. The credit can be carried forward up to 20 years. 45L can also be combined with the 179D commercial building energy efficient tax deduction, making it worthwhile to plan ahead and bundle these tax incentives when and if possible.

Tax Point Advisors works with CPA firms and business owners to coordinate the energy analysis for the 45L tax credit. We offer in-house engineering capabilities and the tax expertise to help you apply and qualify for this valuable tax credit.

Click here to request a free 45L assessment.

Real estate developers and construction contractors interested in reviewing the revised 45L tax credit rules and how they can apply them to their future projects can simply fill out the form on this page and a member of our team will be in touch with you. You may call us at (800) 260-4138 nationwide.