The 45L Tax Credit: What Is It and How It Benefits New Home Construction

45L tax credit is a tax incentive designed to promote greater energy efficiency

One way that many countries are attempting to spur the development of energy efficiency technologies is through tax credits and rebate programs.

While many programs, such as energy benchmarking and energy efficiency mortgages, have been around for a while, the Inflation Reduction Act has made energy efficiency a central part of its green initiative.

Under the Inflation Reduction Act passed in 2022, many green energy tax credits were expanded, including the Nonbusiness Energy Property Credit and the Energy Efficient Home Improvement Credit (formerly known as the Nonbusiness Energy Property Credit), to incentive homeowners to make their homes more energy efficient.

In addition, the act also expanded the 45L tax credit for home builders to promote greater sustainability in new construction homes. Thanks to this lavish expansion, the 45L tax credit will align with the DOE Zero Energy Ready Home and Energy Star initiatives for cleaner homes of the future.

This article will discuss everything you need to know about the 45L tax credit expansion and how it impacts new construction homes.

What Is the 45L Tax Credit?

The 45L tax credit is a tax incentive designed to promote greater energy efficiency in new home construction. Under the Inflation Reduction Act, the credit rewards home builders and contractors with up to a $5,000 tax credit for any qualifying dwelling that meets national energy standards for efficiency.

Under the new tax program, any dwelling that is 50% more energy efficient than a similar dwelling built to meet the standards outlined in the 2006 International Energy Conservation Code may qualify for the program.

Unlike other tax credits, this program rewards builders directly, although it confers energy savings to homeowners and business owners down the line.

Previously, the 45L tax credit was only reserved for builders of low-rise residential developers and only awarded $2,000 in benefits. However, under the Inflation Reduction Act the credit was extended to $5,000 per unit and designed to align with Energy Star and Zero Energy Ready Home standards so that all residential developers were eligible.

Additionally, thanks to these amendments, developers no longer have a height restriction, so any unit of any height may qualify.

Finally, developers also have the option to use the 45L tax credit with the commercial 179D tax credit where applicable.

Who Qualifies for the 45L Tax Credit?

The 45L tax credit is reserved for residential and multifamily developers and excludes commercial development or homeowners from applying for the credit.

In total, the following units are eligible for the tax credit, granted that they pass the required specifications of the energy standards set forth by the Department of Energy.

  • Single-family homes
  • Multifamily homes
  • Assisted living facilities
  • Student housing
  • Additional dwelling units (ADUs)

Since there is no cap on the law, you could qualify for millions in tax credits based on the sheer number of dwelling units your company handles.

To help receive the credit, there are various strategies builders can take, such as using energy-efficient building materials and Energy Star-rated equipment that promote energy conservation.

How Do I Apply for the 45L Tax Credit?

Applying for the 45L tax credit requires meeting the standards of the law and getting certified by an independent party with Residential Energy Services Network (RESNET) or similar certification. The certifier must be independent of your business and familiar with the appropriate IRS software and guidelines to certify your property.

Since certification must be planned in advance, it’s recommended that builders begin thinking about and reaching out to an independent third-party or energy consultant early in the development process to ensure they meet proper qualifications.

 How Does the 45L Tax Credit Benefit New Home Construction?

The 45L tax credit benefits builders and homeowners by incentivizing the use of sustainable technology that confers savings to everyone.

Developers can acquire more equity for each qualifying unit they buy, and homeowners can save money on energy bills by purchasing homes built to the latest standards.

Furthermore, builders can construct safer and more efficient homes that increase customer satisfaction and award them more contracts in the future.

In total, there is very little downside, if any, from leveraging this tax credit on any property constructed.

How Long has the 45L Tax Credit Been Extended?

Under the Inflation Reduction Act, the 45L tax credit has been extended until the end of 2032. Whereas, at that time the credit expires, it will need to be extended or sunsetted.

The 45L tax credit offers several advantages for builders and developers. Be sure to contact a qualified consultant and third-party certifier to discuss your options and strategies to help receive this credit.