Inflation Reduction Act Expands 45L Tax Credit for Energy Efficient HomesAugust 29, 2022
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA), which includes billions of dollars in investments to reduce carbon emissions and produce renewable energy. The IRA, most notably for the residential real estate development and homebuilding industries, extends and expands the Section 45L Tax Credit for Energy Efficient Homes.
Section 45L is a federal tax credit for the sale or lease of energy-efficient residential dwelling units. The Section 45L tax credit was created in 2005 and most recently expired at the end of 2021. The IRA extended it for the next ten years, and it is now available through the end of 2032.
Developers and builders of residential dwelling units sold or leased during 2022 are eligible for the Section 45L tax credit under the prior requirements and can retroactively claim credits.
For residential dwelling units sold or leased beginning in 2023, the credit amounts are increased, enabling developers and builders to claim more Section 45L tax credit dollars than ever before. The energy efficiency requirements to claim the increased credit amounts are changed to now simply require either ENERGY STAR or Zero Energy Ready Home (ZERH) certifications.
Single-family dwelling units, including traditional side-by-side townhomes and duplexes, are eligible for a $2,500 per unit Section 45L tax credit for ENERGY STAR certification. That amount is increased to $5,000 per unit if additionally certified under the ZERH program.
Multifamily dwelling units, including stacked townhomes and apartment buildings of all sizes, are also eligible for a $500 per unit Section 45L tax credit for ENERGY STAR certification or $1,000 per unit if ZERH certification is also achieved. Those amounts are increased to $2,500 per unit and $5,000 per unit, respectively, if prevailing wage requirements are satisfied.
See below for a summary chart of the available tax credits and requirements.
|Certification||Building Type||45L Tax Credit|
Single Family New Homes
|Single Family Dwelling Units
|$2,500 per unit|
|Zero Energy Ready Home (ZERH)||Single Family Dwelling Units||$5,000 per unit|
Multifamily New Construction
|Multifamily Dwelling Units||$500* per unit
*$2,500 if prevailing wage
|Zero Energy Ready Home (ZERH)||Multifamily Dwelling Units||$1,000* per unit
*$5,000 if prevailing wage
Residential developers can also leverage local utility company rebate programs to offset the costs to qualify for the Section 45L tax credit. That is because the requirements for local rebate programs often directly overlap with the energy efficiency requirements for the Section 45L tax credit. As a result, by achieving ENERGY STAR or ZERH certification, developers can earn both local rebates and the federal tax credit.
The Section 45L tax credit expansion enables developers to bring more energy-efficient dwelling units to market and receive a significantly increased return on investment for energy-efficiency measures over the next ten years.