45L Energy Efficient Tax Credit for Real Estate Developers

Almost 30 percent of global carbon dioxide emissions can be traced back to building operations. This is a surprising number that reflects the impact certain building systems can have on the environment. Beyond this, older systems are likely to be consuming more resources, and therefore cost more, to operate. That is why so many have decided to leverage renewable energy systems to address the problem. In addition, since the government wants to incentivize the switch to green building systems, owners and developers that make qualifying upgrades may be eligible to receive a lucrative tax credit. Section 45L provides credit for the installation/upgrade of certain energy-efficient systems. Concurrently, an energy savings benchmark must also be achieved to qualify. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

What is Section 45L?

Section 45L is a tax credit worth up to $2,000 per dwelling for properties placed in service or leased between August 8, 2005, and December 31, 2021. Properties must meet certain energy efficiency guidelines to qualify. Usually, only builders or developers can claim the credit. There have already been talks to extend and expand 45L and it’s possible it could be reinstated retroactively.

Eligible dwellings must be in the U.S. and range from single- and multifamily homes to student housing, senior living facilities, and condominiums or townhomes. Both primary residences and rental properties qualify. The property can’t be more than three stories tall, not including underground parking garages. Construction doesn’t have to be new; energy-efficient retrofits or upgrades can qualify, too.

Meeting 45L requirements mean the property needs to meet or exceed 50 percent energy savings compared to the 2006 International Energy Conservation Code (IECC). The building envelope would need to show at least one-fifth of energy savings on its own. Lower credits are available for properties that meet 30 percent energy savings. When a property qualifies for 45L, it may very well qualify for other federal and state energy efficiency tax incentives, too.

A common misconception, especially for developers of large projects, is that all homes in each project must meet the 50 or 30 percent energy savings to qualify. This isn’t true; the credit is on a per-property basis, and it’s very possible that some units would qualify for the higher credit, others the lower tier, and yet other units may not qualify at all. Developers who are retrofitting certain units as part of a larger portfolio should also keep that point in mind, as they could be unknowingly disqualifying themselves.

Who Qualifies for 45L?

The builder or developer can be an individual, trust, estate, or business entity like a partnership, association, company, or corporation. Usually, homebuilders and developers are the ones claiming the credit.

Eligible contractors, according to the IRS, must have built, owned, and/or held a basis in the property while it was being built. An eligible builder or developer is permitted to hire a third-party contractor for the project.

Claiming 45L

Certifying a property for 45L must involve a third-party energy analysis. This process will look different depending on if the property is new or existing. The property’s heating, cooling, lighting, air distribution, hot water system, and other home energy systems will be evaluated against the appropriate year’s energy codes.

Once the energy certification is completed, the builder or developer would submit the report along with Form 8908 for each property. 45L can be carried back for up to five years to 2006 and carried forward up to 20 years.

Building a high-performance dwelling that meets 45L requirements does cost about five percent more, but the tax credit combined with significantly lower operating costs offsets the initial price tag for both owners and residents.

Potential Changes to 45L

Energy-efficient building design and construction is still high on political agendas. But when energy-efficient tax credits are included as part of a much larger bill, there are bound to be delays and changes. Build Back Better would have added extra incentives for builders and developers to prioritize energy-efficient homes and dwellings.

Changes to 45L in that legislation would have extended the tax credit through 2031 and increased the credit amount to $2,500 and $5,000 for single-family and manufactured homes, respectively, that reach Zero Net Energy standards. The base tax credit for multifamily homes would be $500 with a bonus credit of $2,500. Multifamily Zero Energy Ready Homes’ base rate would increase to $1,000 with a bonus credit of $5,000.

Differing tax credit rates for multifamily homes would depend on whether the builder or contractor used prevailing wages and/or apprenticeships.

As of this writing, 45L has not yet been renewed past December 13, 2021. Like potential changes to Section 179D, nothing has materialized yet. Section 45L is a popular tax incentive that fits into bipartisan plans for sustainability. Many tax incentives have expired only to be renewed retroactively, so even if a developer or builder wouldn’t qualify in the current tax year (yet), it’s still worth examining prior years to see if submitting an amended return would make sense.

Contact Us

Section 45L can be a lucrative tax savings opportunity for many home builders and developers. Even those who have made recent retrofits may be eligible. If you have questions about the information outlined above or need assistance with claiming the credit, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.