Section 45L Energy Efficient Home Tax Credit is a tax incentive designed to promote the construction of energy-efficient residential properties. It allows eligible contractors to claim a tax credit for each dwelling unit including single-family, manufactured and multifamily homes. The Inflation Reduction Act of 2022 (IRA 2022) extended the energy efficient home credit to cover qualified new energy efficient homes sold or leased after 2021 and before 2033. In September, the IRS issued Notice 2023-65, which contained guidance for taxpayers on the Section 45L credit as amended by the IRA. This Notice applies to qualified new energy efficient homes acquired after December 31, 2022.
What are the Qualifications for Section 45L?
To qualify for the Energy Efficient Home Credit, a home must meet specific energy-saving requirements provided by the Energy Star Residential New Construction Program related to heating, cooling, water heating and building envelope components. The credit amount is based on the extent to which each new energy efficient home meets the energy-saving requirements. These requirements are based on standards outlined in the International Energy Conservation Code (IECC), which is a model code used for energy efficiency in buildings. IRA 2022 changed the energy efficiency criteria to align with the Energy Star and Department of Energy’s Zero Energy Ready Homes (ZERH) programs for 2023 and onward.
All residential buildings, apartment buildings, residential condominiums and single-family home developments with 20 or more units can be evaluated for the energy tax credits. For 2022 and prior homes that have been leased or sold as a residence within buildings higher than three stories above grade were not eligible for the credit; however, IRA 2022 removed that requirement so now mid-rise and high-rise buildings can be eligible for the credit for 2023 and onward.
Section 45L Tax Credit Summary
The base level tax credit for energy-efficient homes and units acquired on or after January 1, 2023, is tied to meeting the Energy Star Program or ZERH Program requirements for single-family, manufactured and multifamily homes. To qualify, a home must meet all required specifications under IRC Section 45L. Homes in U.S. territories are not eligible for the credit but can still earn Energy Star Certification.
Energy-efficient homes that are certified under the Department of Energy’s ZERH program can receive a larger tax credit but requires an Energy Star certification as a prerequisite. For homes sold or leased before 2023, Section 45L credits were not applicable under the ZERH program.
- For homes acquired in 2023-2032: The credit amount is up to $5,000 based on the applicable program and program requirements under which the home was built.
- For homes acquired before 2023: The credit amount is $1,000 or $2,000, depending on the energy saving requirements met.
Who Can Claim the Energy Efficient Home Credit?
Contractors who meet the eligibility requirements can claim the credit for newly acquired energy-efficient homes, which are sold or leased to individuals by the said contractor and intended for use as a residence. The IRS defines an eligible contractor as the person that constructed a qualified energy efficient home or produced a qualified energy efficient home that is a manufactured home. To qualify as an eligible contractor for the qualified energy-efficient home, a person (individual, trust, estate, partnership or corporation) must own the home and have a basis in it during its construction. An eligible contractor must obtain a certification from a qualified certifier for homes sold or leased before claiming the credit. Eligible contractors, partnerships and S corporations must file Form 8908 to claim a credit for each qualified energy efficient home sold or leased to another person during the tax year for use as a residence.
The Energy Efficient Home Tax Credit incentivizes energy-efficient construction, which encourages the adoption of sustainable practices. If you think you may be eligible for the Section 45L tax credits, then contact the BSSF tax professionals.
About the Author
Matthew Fox, CPA is a Principal at Brown Schultz Sheridan & Fritz (BSSF) and a key member of the Firm’s Tax Department. He received his Bachelor of Science degree in Accounting from Pennsylvania State University. Matt has over 18 years of public accounting experience. He leads the Craft Beverage Group at BSSF, specializes in Research & Development (R&D) Tax Credit consulting and serves a variety of industries including craft beverage, insurance, construction, real estate, manufacturing and financial services.