Section 45L

New Energy Efficient Home/Dwelling Unit Credit

Section 45L.- Cost Segregation Authority


On Dec. 27, 2020, the Consolidated Appropriations Act, 2021, H.R. 133, was signed into law which extended the 45L Energy Efficient Home Tax Credit to include any new, qualified energy-efficient homes through 2021. This credit has been around since 2005. It is available to taxpayers with properties built in open tax windows and is one of the most underutilized by taxpayers!

How It Works

An eligible contractor, builder, developer, or owner must construct a qualified energy-efficient home/unit that is no more than 3 stories above grade. It must be built to use at least 50% less energy than a comparable unit built to the 2006 International Energy Conservation Code. If the qualification is met, then a tax credit of $2,000 per home or rental unit is taken!

Section 45L.- Cost Segregation Authority

What Qualifies for Section 45L?

Who Qualifies?

The taxpayer who built the property (and then either sells, leases, or used the property for themselves) is eligible.

What Type of Items Are Needed for the Study?

Basic information such as the address of the property and (if applicable) the number of units. Other items such as building plans and information about the insulation, windows, and HVAC systems will also be required.

How will Section 45L Affect My Tax Return?

The credit is a general business credit that can offset tax dollar for dollar.  The credit is taken on tax form 8908.

Example: An 85-unit assisted living facility met the qualifications, so a tax credit of $170,000 was taken on the tax return!

45L Energy Efficient Dwelling Unit Tax Credits

If you develop, build or own energy-efficient residential dwelling units, you could earn tax credits of $2,000 per unit.

To qualify for the $2,000 tax credit, eligible dwelling units must be certified to meet or exceed the required energy efficiency benchmarks, and then sold or leased no later than December 31, 2021. Although the credit can be taken against single-family housing units, you can also leverage this opportunity for townhomes, condominiums, senior housing, and other types of property, as long as the property meets the necessary criteria. Fortunately, today’s energy-conscious building codes and efficiency standards mean that your properties may already qualify.

To take advantage of this valuable, cost-saving incentive, however, you must engage a qualified, third-party professional to provide the certification documents necessary to apply for the available tax credit.

Understanding the 45L Energy Efficient Residential Tax Credit

Under Title 26, U.S. Code § 45L, New energy efficient home credit, the federal government provided a significant incentive for investors to develop energy-efficient dwellings. Units can be either rental properties or owner-occupied residences. However, the property must be sold, rented, or leased to a residential user during the tax year in which you wish to take the credit.

This program was originally introduced in 2005. It has been extended over the past decade, most recently in December 2020, through the end of 2021. The program is retroactive for three years or for any open tax year you have on your books.

The value of this incentive can increase exponentially, if you develop multi-unit dwellings, providing $2,000 in direct tax credit per certified unit. This is a dollar-for-dollar tax offset (not a deduction), which directly reduces your tax liability to the IRS. For a 150-unit complex, for example, you could earn $300,000 in tax credit, any unused portion of which you can carry over for up to 20 years.

Properties That Qualify for 45L Tax Credits

A qualified new energy-efficient home is any dwelling unit – including townhomes, apartments, condos, dorms, senior housing, and single-family homes – that is located within the United States and that meets the following criteria:

  1. Constructed between 2005 and 2021,
  2. Finished height of three floors or less, and
  3. Meets the energy savings requirements of the code section.

The energy savings conditions require that the unit be certified to consume energy for heating and cooling at a rate of 50% or below the level of a comparable unit. The property must be built to the standards of Chapter 4 of the 2006 International Energy Conservation Code. The property must have component improvements with the building envelope that account for 1/5 or more of the 50% reduction in energy consumption.

It is important to note that you may be able to apply for the 45L credit for properties that have undergone substantial reconstruction or renovation. However, the energy efficiency requirements may vary somewhat under these circumstances. Consulting with an experienced 45L certification provider is the best way to determine whether your property qualifies for the incentive.

Requirements to Leverage Tax Credits for Energy Efficiency

To claim your energy-efficient dwelling tax credit, you must provide a detailed project analysis and certification report with your application.

The report provider must be a qualified, unrelated, third-party entity, and the report must be signed off by an eligible certifier.

Obtaining the required analysis and certification, which typically involves a review of construction documents, a site visit, and a detailed analysis using sanctioned software, does require a small investment.

To help you determine if you qualify for this tax incentive, Cost Segregation Authority offers a free benefits analysis. Contact us today to learn more, or to request your free 45L energy-efficient dwelling tax credit pre-analysis.