You already know that energy-efficient homes are sustainable, eco-friendly, and better for the planet as a whole. But if you are a builder or real-estate developer, then energy-efficient homes might also be better for your bottom line.
A home designed to be energy efficient will fetch a higher price when you’re ready to sell it or rent it out. But you can also claim the $2,000 45L Energy-Efficient Home Tax Credit, a special financial incentive designed to encourage real-estate developers to invest in environmentally sustainable properties.
An energy-efficient home will automatically lead to lower utility bills. According to estimates provided by the U.S. Department of Energy, the average American household can save up to 25 percent on utilities every year by upgrading their living space for greater energy efficiency. In real terms, they would be saving upwards of $2,200 per year.
Once installed and operational, these energy efficient upgrades will also make the house much more environmentally sustainable.
Environmental sustainability is one of the most important social concerns of our time, with individuals, governments, and corporations doing everything in their power (and spending vast amounts of money) to reduce their carbon footprint whenever possible. So energy savings and sustainability together are powerful selling points.
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What Is The 45L Tax Credit?
If you have recently constructed (or substantially renovated) your home – be it a townhouse, single family home, or condominium – then you might be eligible for the 45L Energy-efficient Home Tax Credit, which offers a maximum incentive of $2,000 per dwelling unit.
You will only be able to claim this tax credit, however, if your newly constructed (or renovated) home meets certain standards of energy efficiency. For instance, it should have an annual energy consumption level approximately 50 percent lower than that of a comparable residential space which wasn’t designed to be energy efficient.
This tax credit was established by the Energy Policy Act of 2005 and was subsequently added to the Internal Revenue Code. Although the provision was scheduled to expire on the last day of 2020, it has now been extended by the Consolidated Appropriations Act to December 31, 2021.
In other words, the 45L tax credit is retroactively available for energy-efficient residential projects placed in service between 2018 and 2021. A property (or any other durable asset) is “placed in service” when it is first sold, leased, or placed in use from an accounting standpoint. This is used to calculate depreciation, and the date when the property (or asset) is placed in service marks the beginning of its depreciation period.
A builder or real-estate developer can only claim the 45L tax credit on a home that was sold or leased during that same tax year. If the energy-efficient house you built has not yet been sold, rented, or leased for use as a residence, then you will not be able to claim this tax credit. The 45L credit can be claimed retroactively for past years, but the home must be sold or leased by December 31, 2021, for it to be eligible.
Who Is Eligible?
The builder or developer of the energy-efficient residence is eligible for the 45L tax credit. The person applying for the tax credit must have constructed the energy-efficient home. They must also have owned (or at least had a stake in the home) during the construction period. Here’s what the instructions for tax form 8908 say:
Who May Claim the Credit
Eligible contractors may claim the credit for new energy efficient homes that are acquired by sale or lease by an individual from that contractor during the tax year for use as a residence.
For instance, if you are planning to develop an energy-efficient apartment building – and hire a contractor to oversee and manage the construction process – then you will be the one to benefit from the 45L tax credit, not the contractor you hired. Similarly, if you hire a contractor to renovate your old townhouse for greater energy-efficiency before putting it up for sale, then you will be the one eligible for the tax credit, not the person or firm hired for the renovation.
Homeowners who have gone to the expense of building an energy-efficient home (or renovating an existing house for greater energy efficiency), only to have to put it up for sale before they’ve had the chance to enjoy the lower utility bills, can recoup some of the costs by claiming the 45L tax credit, once the sale is through. And homeowners who are renovating to sell can look forward to the tax credit plus a higher resale value for their home.
Real estate developers who have recently constructed new, energy-efficient apartment buildings, student housing, senior living facilities, or condominium projects can benefit from the 45L tax credit. But the tax credit can only be claimed for the dwelling units that have already been sold, rented, or leased. For each energy efficient unit either sold or leased, a tax credit of up to $2,000 will be granted.
You can also claim this tax credit for residential properties you have constructed in the past, either for sale or as rental property. Under the Tax Increase Prevention Act of 2014, you can retroactively claim the 45L tax credit for energy-efficient properties that you’ve built or remodeled since 2018.
Eligibility Criteria For Residential Properties
However, a residential property must meet certain criteria in order to be eligible for the tax credit. These are as follows:
- Various types of residential buildings are eligible for the 45L tax credit, including single family homes, multi-family dwellings, apartment buildings, townhouses, assisted living homes, and student housing facilities.
- To be considered eligible, the residential property must be located in the United States.
- The residential property must be no more than three stories above grade, not including underground parking space. In real estate, the term “above-grade” simply refers to the portion of a building that is above the ground.
- The energy needed for heating and cooling the house should be at least 50 percent less than that needed to heat and cool a comparable property that was built in accordance with the 2006 IECC standards.
- At least 10 percent of the reduction in energy consumption should be attributable to the envelope components of the property, such as the floor, walls, windows, and roof.
- Any heating and cooling equipment installed on the property, including heaters and air conditioners, should meet the latest minimum energy efficiency standards set down by the U.S. Department of Energy.
- In order to qualify for the 45L tax credit, a property must be designed solely for residential purposes. Hence, it should comprise a kitchen space, a living room, and at least one bedroom.
- There is no limit to the number of residential units for which you can claim the 45L tax credit, as long as the homes meet the required standards of energy efficiency. You could claim $2,000 for a single-family home or $1,000,000 for the 500 units in your recently completed condominium project.
How To File For The 45L Tax Credit
To file for the 45L tax credit, you must first obtain the necessary certifications to verify that the property meets all the above-mentioned standards of energy efficiency. These certifications must be obtained from an independent and qualified certifier, making use of the latest, IRS-approved software.
The certifier assessing the property must be accredited by the Residential Energy Services Network (RESNET) or a similar rating network. However, you cannot certify a property that belongs to you or to a relative of yours, even if you are an authorized and qualified certifier in your own right. You must hire an independent expert who is not related to you in any way, and can conduct the verification in an impartial manner.
Claiming The Tax Credit
The process of claiming this tax credit is slightly complicated, and involves multiple steps:
- During a site visit, the certifier will use various methods – like computer modeling and on-site testing – to verify that the property incorporates the required energy-efficient features.
- In order to certify a property for the 45L tax credit, the certifier will probably review the construction documents, arrange meetings with the building designers, and conduct site visits, as required.
- If, after extensive testing, the home meets the required standards of energy efficiency, the certifier will have to state this fact in writing, under penalty of perjury.
- Once the certifier has provided you with all the certifications you need, you will have to use IRS Form 8908 (Energy Efficient Home Credit) to file for the 45L tax credit.
What You Need To Do To Qualify
Here are some of the energy-efficient upgrades that, when implemented, might help qualify your property for the 45L tax credit:
- The use of hydronic panels to minimize the amount of energy usage for heating.
- Reflective roofing – with materials like aluminum, copper, or clay tiles – for energy-efficient temperature regulation.
- Installing HVAC units with a SEER rating of 13 or above, to minimize energy usage in the house.
- Double- or triple-pane windows for better insulation and reduced noise pollution.
- Passive solar home design optimized for collecting heat generated by sunlight, and retaining it in materials that can store heat, like concrete, stone, and tile.
Once you have implemented some (or all) of these energy saving measures, you will be ready to begin the process of getting your home approved for the 45L tax credit.