The Inflation Reduction Act: Revived §45L Tax Credit

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The original Internal Revenue Code Section 45L Energy Efficient Home Credit expired on December 31, 2021. It provided a $2,000 credit for energy efficient home construction and major improvements in a dwelling that is leased or sold as a residence. Now, the Inflation Reduction Act (IRA) has revived this credit. For the next ten years, from January 1, 2023 through December 31, 2032, the IRA significantly changes the 45L Credit with new provisions and requirements. These provisions are available to real estate developers and investors alike. Here are the major changes.

§45L Tax Credit Updates

Beginning in 2023, new homes certified under the Energy Star programs will be eligible for a $2,500 tax credit.  

 

The credit increases to $5,000 for dwelling units certified under the Zero Energy Ready Homes Program (ZER).  

For multifamily units, the base qualification decreases to $500, while ZER multifamily units are $1,000 each.  

Multifamily units meeting prevailing wage requirements will receive an increased $2,500 credit for base qualification and $5,000 for ZER.

How to Qualify for §45L Tax Credit Updates

The expanded credit comes with a few stipulations to consider. Developers must reduce the tax basis in properties by the amount of credit claimed under Section 45L. Low Income Housing Tax Credit (LIHTC) projects are the exception. They will not be required to reduce basis by the amount of 45L tax credit taken.  

Additionally, taxpayers seeking the credit must go through a qualification process to ensure their project is eligible under the Department of Energy guidance. To qualify for single-family, manufactured, and multifamily dwellings, the buildings must meet both national and local requirements. 

Lastly, there will also be prevailing wage requirements for additional multifamily credit benefits, ensuring laborers are paid competitive rates. If prevailing wage requirements are also satisfied, the credit for multifamily homes increases to $2,500 or $5,000, respectively. The table below summarizes the 45L Credit rules beginning in 2023.

Here is a chart to help explain the credit and the differences in Energy Star, ZER, and prevailing wages:

 

Energy Star

Energy Star plus Prevailing Wages

Zero Energy Ready

Zero Energy Ready plus Prevailing Wages

Multifamily Developer

$500

$2,500

$1,000

$5,000

Single Family (for sale or rent)

$2,500

$2,500

$5,000

$5,000

This revived credit provides major saving opportunities for real estate builders and investors who are looking to make their dwellings top-of-the-line in regards to energy efficiency. If you want to read more about this credit on your own, visit the U.S. Department of Energy website.

Headshot of Hayley L.

Hayley Lowe

Hayley is an Analyst who works with our CAS, assurance, and tax teams.  She has a natural talent for finding efficiencies in processes and integrating software to assist in that. Hayley has been with Avizo for a little over a year and is working on earning her CPA designation. 

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