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How does the 45L tax credit work?

Building energy-efficient homes may cost more upfront, but it provides environmentally friendly and energy-efficient housing to pay future dividends. There’s also a tax credit for contractors that offer $2,000 per qualified unit. The energy-efficient home credit, known as the 45L credit, provides an incentive to builders of single-family and multi-family homes. It’s also available for substantial renovation or upgrading projects.

What Does the 45L Tax Credit Cover?

The 45L tax credit provides contractors with a $2,000 tax credit for each housing unit built or remodeled to certain energy-saving specifications. It can be available retroactively to 2018-2020 and is valid for residential housing units that are built or renovated, as well as sold or leased, by December 31, 2021.

Projects must be three stories above ground or less, not including underground parking. They must also consume at least 50% less energy for heating and cooling as a comparable non-energy-efficient housing unit. Similar non-energy-efficient units for comparison purposes must also be constructed according to the standards in chapter 4 of the 2006 International Energy Conservation Code. This code provides heating and cooling efficiency minimums allowed by the Department of Energy regulations under the National Appliance Energy Conservation Act of 1987 for new construction.

The building envelope itself needs to be one-fifth of the energy efficiency improvement and be 10% more efficient than identical non-efficient housing units. The building envelope includes walls, windows, roof, and foundation, which form a thermal barrier between the outdoors and the indoor environment.

New construction must have some energy-efficient features, including:

  • Double- or triple-pane windows.
  • Hydronic heating panels for radiant floor or radiator systems using hot water or steam.
  • Reflective roofing that limits heat loss.
  • HVAC systems with a SEER (Seasonal Energy Efficiency Ratio) of 13 or higher for air conditioning.
  • Insulated exterior doors.
  • Roof insulation with an R-value of 38 or higher, or wall insulation with a rating of R-13 to R-19.
  • Gas furnaces with an 80% or higher efficiency rating.
  • Insulated foundations or slabs.
  • Vinyl windows rated Low E, or low-emissivity, which reflect heat.

New construction of single-family homes can qualify if the unit is sold or rented out after it’s built. The 45L tax credit provides the most significant impact for multi-family housing projects like apartments, townhomes, condominiums, student housing, and assisted living facilities because it’s provided for each housing unit. Housing units need one or more rooms, including a kitchen, living room, and sleeping area.

Remodeling projects with energy-efficient upgrades qualify for the credit. Materials and supplies that could be used for qualifying projects include:

  • Double- or triple-pane windows.
  • Hydronic heating panels for radiant floor or radiator systems using hot water or steam.
  • Reflective roofing that limits heat loss.
  • HVAC systems with a SEER (Seasonal Energy Efficiency Ratio) of 13 or higher for air conditioning.
  • Insulated exterior doors.
  • Roof insulation with an R-value of 38 or higher, or wall insulation with a rating of R-13 to R-19.
  • Gas furnaces with an 80% or higher efficiency rating.
  • Insulated foundations or slabs.
  • Vinyl windows rated Low E, or low-emissivity, which reflect heat.
  • Passive solar design of the structure to hide summer sun and bring in winder sun.
  • Structural insulated panels, which contain an insulated foam core.
  • Vacuum insulated panels, which contain a gas-tight enclosure around a rigid core.
Calculator and notepad placed over stack of USA dollars
Photo by Karolina Grabowska from Pexels

Who Benefits From the 45L Tax Credit?

The credit benefits the qualified builder or developer, directly, and indirectly benefits future owners and occupants of the housing through lower energy bills. The home must be sold, leased, or rented out to qualify for the 45L tax credit.

The 45L tax credit encourages builders to use energy-efficient construction materials. Some energy-efficient materials cost more, but the tax credit combined with increased equity in the construction project and lower energy bills for occupants have long-term benefits. Housing that’s certified can be marketed as “green living” and attract residents who are seeking housing that’s friendly to the environment as well as their budget. Buyers of certified units will also see increased equity as well as environmental and budgetary benefits.

Unused 45L tax credits may be carried forward for up to 20 years by the builder or developer.

How Does the 45L Tax Credit Work?

First, the contractor must become certified by an independent and accredited certifier. The certifier must be accredited or authorized by a rating network and use software approved by the Internal Revenue Service. An example of a rating network is the Residential Energy Services Network (RESNET). The certification package includes on-site testing and computer modeling by the certifier. This package is signed off by the certifier and contains all the information needed for the 45L tax credit. Fees are typically assessed on a per-unit basis.

There is no minimum or maximum number of housing units that can be certified in a project. This credit applies retroactively to projects from 2018 to 2020 and throughout 2021.

The credit applies and is claimed on the tax return for the year the certified housing units are leased or sold. It typically works best in a 9% Low Income Housing Tax Credit (LIHTC) transaction for new construction or substantial rehabilitation. The 9% figure refers to tax credits for approximately 9% of the project’s construction cost for projects without federal subsidies.

Contractors and developers interested in pursuing the 45L tax credit should seek assessments and pre-qualification for the property. They should also coordinate with their tax preparer to claim the credit. The certification process could include reviewing construction documents, in-person visits to the site, and consultation with building designers, project managers, and related staff members. Early preparation for this process is critical, as it can require coordinating multiple people and pieces of a housing project.

The 45L tax credit helps contractors and developers build energy-efficient housing that’s more marketable, holds more value, and shields future residents from rising energy prices. If you have any questions about how the 45L tax credit can benefit your business as well as future occupants of housing units that are built using this credit, contact the team at Energy Diagnostics, Inc.