Section 45L Energy-Efficient Home Tax Credit Extended to December 31, 2021

The 45L tax credit was previously set to expire at the end of 2020. However, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 as part of the Consolidated Appropriations Act, 2021 extended this energy-efficient home credit to cover qualified new energy-efficient homes sold or leased in 2021.

Real estate owners and investors alike hope to minimize their risk while profiting from opportunities. One of these opportunities deals with the updating of the 2006-27 Notice of Certification for IRS § 45L(c)(1)(A) and (B) of the Internal Revenue Code. The goal of the IRS Code was to make energy-efficient home tax credits available to eligible contractors, thereby stimulating sustainable building practices in the United States.

Eligible contractors may request up to a $2,000 credit for new energy-efficient systems and installations in units leased or sold in 2021 and retroactively for all residential and apartment buildings completed within the open tax years (generally the last 3 years).

The highlights of this tax credit are below. Still, it is always a good idea to contact a CPA about qualifying for and using these tax credits.

Who is eligible?

An eligible contractor is a person who constructed a qualified energy-efficient home.  That person must own and have a basis in (legally own) the qualified energy-efficient home during its construction to qualify as an eligible contractor with respect to the residence.

What is a qualified new energy-efficient home?

A qualified new energy-efficient home is a dwelling unit

  • Located in the United States
  • Whose construction is substantially completed after August 8, 2005
  • Is sold or leased to another person after 2005 but before 2022
  • That meets the energy saving requirements of § 45L(c)(1); and (4)

Dwellings like single-family homes, apartment buildings, townhouses, student housing, condominiums, and assisted-living facilities are all eligible but can be no more than three stories above ground (basements are not counted).

How is the energy-saving requirement satisfied?

According to the IRS, the energy savings are as follows:

Energy Saving Requirements. To meet the energy saving requirements of § 45L(c)(1), a dwelling unit must be certified to provide a level of heating and cooling energy consumption that is at least 50 percent below that of a comparable dwelling unit constructed in accordance with the standards of section 404 of the 2004 Supplement to the 2003 International Energy Conservation Code (2004 IECC Supplement), and to have building envelope component improvements that provide for a level of heating and cooling energy consumption that is at least 10 percent below that of a comparable dwelling unit. For this purpose, heating and cooling energy and cost savings must be calculated in accordance with the procedures prescribed in Residential Energy Services Network (RESNET) Publication No. 05-001 (Nov. 17, 2005).”

It is critical, then, that the dwelling be certified by an eligible certifier. Licensing is required. And it is a good idea to find reliable certifiers referred by professionals in the industry or associated, in this case, with CPAs or attorneys who specialize in commercial real estate.

How much are the tax credits?

(From the IRS Website, Form 8908 2/2021)

“The credit is $2,000 for a dwelling unit [e.g., each apartment, each townhouse, each dormitory, or each apartment, townhome, or dormitory building] that is certified to have an annual level of heating and cooling energy consumption at least 50% below the annual level of heating and cooling energy consumption of a comparable dwelling unit and has building envelope component* [see definition below] improvements that account for at least 1/5 of the 50% reduction in energy consumption.

“The credit is $1,000 for a manufactured home that doesn’t meet the 50% energy saving requirement but is certified to have an annual level of heating and cooling energy consumption at least 30% below the annual level of heating and cooling energy consumption of a comparable dwelling unit and has building envelope component improvements that account for at least 1/3 of the 30% reduction in energy consumption.”

Summary of credits for each dwelling unit:

  • $1,000 for a minimum of 30% energy savings (1/3 of the 30% must come from building envelope component improvements.)
  • $2,000 for 50% or greater energy savings (1/5 of the 50% must come from building envelopment component improvements.)

*A building envelope is commonly defined as the separation of the interior and exterior of a building.  It is made up of the foundation, roof, walls, doors, windows, ceilings, and their related barriers and insulation.

Worth repeating: The calculation of the energy savings should be done by a certified professional requiring proper analysis of the energy/building before, during, and after the construction and knowledge of the tax laws associated with the credits.

When can the tax credits be claimed?

As noted above, the 45L tax credit can be claimed retroactively for all residential and apartment buildings completed within the open tax years which is generally the last 3 years. Any unused credit may be carried forward for up to 20 years. It is worth noting that the taxpayer must have a tax liability to use the tax credit. Otherwise, it will be applied to future years.

Conclusion and Recommendations

Any real estate developer or building contractor who has constructed or is constructing energy-efficient residential dwellings can apply for the 45L Energy-Efficient Home tax credits, which have been extended to December 31, 2021, through the Tax Relief Act of 2020. Homeowners are eligible as well. As noted above, the savings go beyond the solar panel credit, and the gained efficiencies should be certified by third-party, licensed individuals of reputable standing.

If you’re interested in this credit and want to find resources and energy savings certifiers, contact us.

Energy-Efficient Home Tax Credit