Section 45L tax credit rewards developers of energy-efficient homes

Developers that build or substantially renovate qualifying residential dwelling units that meet certain energy-saving standards may be eligible for a one-time $2,000 per-unit credit when the units are sold or leased. The Section 45L new energy-efficient home credit applies to new residential units that meet certain criteria. Contractors that want to claim the credit need to follow specified procedures to certify the units in question. Once these legal hurdles are cleared, the credit can result in significant savings for businesses that develop multiple units during the year.

Section 45L requirements for a “new energy-efficient home”

Before a property can be evaluated in terms of its energy efficiency, it must meet certain requirements to be eligible for the credit. Each unit must be:

• Located in the United States.
• Made up of one or more rooms, including a kitchen.
• Designed as a unit for occupancy by one family for the purposes of cooking, living, and sleeping.

The entire building must be no more than three stories above ground. The units can include apartments, condominiums, assisted living facilities, student housing, townhomes, and single-family homes. The credit is available for new construction and for buildings that have undergone “substantial reconstruction and rehabilitation.”

The eligible contractor that owns the unit during construction claims the credit in the year the unit is sold or leased as a residence. The 45L tax credit was originally enacted in 2005 and has been extended multiple times during its existence. As currently written, the credit is available for qualifying energy-efficient homes that are acquired from eligible contractors on or before Dec. 31, 2021.

The eligible contractor that owns the unit during construction claims the credit in the year the unit is sold or leased as a residence.

Energy efficiency requirements for the Section 45L tax credit

Residential units that meet the criteria above must then be evaluated to determine if they meet the energy efficiency requirements of the 45L tax credit. The law requires that each unit have a level of heating and cooling energy consumption that’s at least 50% below standards set forth in the 2006 International Energy Conservation Code, and the heating and cooling equipment used must meet or exceed requirements set forth in Department of Energy regulations.

To qualify for the credit, the contractor engages an eligible certifier that’s not related to the contractor and is accredited or otherwise authorized by the Residential Energy Services Network or an equivalent rating network. The certifier does some on-site testing and uses IRS-approved software to create a computer model that verifies the energy-efficient properties of the construction. The certifier then prepares a package that declares under penalties of perjury the certifier’s belief that the facts presented in the certification are true, correct, and complete.

To learn more about how your business might qualify for the 45L new energy-efficient home credit, please contact your Plante Moran advisor.