Understanding the 45L Tax Credit: FAQs Answered for Real Estate Developers

Update: The One Big Beautiful Bill Act (OBBBA) significantly altered numerous business tax credits, including the Section 45L Energy Efficient Home Credit. Under the new law, the expiration date for the 45L Credit was accelerated from December 31, 2032, to June 30, 2026. To qualify for this credit, eligible homes or multifamily units must have construction completed and either the initial lease-up or sale finalized by June 30, 2026. Homes acquired after this date are no longer eligible for the credit. Taxpayers currently in the process of seeking eligibility for this credit should work closely with their engineering firm and tax advisor to ensure all critical compliance deadlines are met, in order to maximize the credit.  

The article below was written before the passage of the OBBBA.

The 45L Tax Credit is a valuable federal tax credit that can reduce the tax burden for real estate developers and provide additional funding source for real estate developers, especially in a tightening market.

Here, we answer some of the most frequently asked questions about the 45L Tax Credit to help developers navigate eligibility requirements, the claiming processes and the potential impact on their bottom lines.

What is the 45L Tax Credit?

The 45L Tax Credit is a federal incentive that was created to encourage the construction and renovation of energy-efficient residential properties. It was originally introduced under the Energy Policy Act of 2005, and it has undergone several extensions and updates since then.

Most recently, the Inflation Reduction Act of 2022 increased the potential maximum savings per dwelling unit from $500 to $5,000 per unit for projects meeting advanced energy efficiency criteria.

The actual amount of the credit depends on the type of home and the home’s energy efficiency.

What Are the Deadlines for Claiming the Credit?

The current 45L Tax Credit applies to qualified energy-efficient homes and multifamily properties acquired after December 31, 2022, and before January 1, 2033.

Developers can claim the credit for the taxable year in which the qualifying property is first sold or leased.

Who Is Eligible for the 45L Tax Credit?

The 45L Tax Credit is available to developers, contractors and homebuilders who construct or significantly renovate energy-efficient residential properties. Eligible properties include single-family homes, townhouses, manufactured homes and multifamily buildings in the United States.

To qualify, the properties must meet specific energy-efficiency standards, including certification under the ENERGY STAR® Single-Family New Homes National Program Requirements Version 3.1 or the U.S Department of Energy’s Zero Energy Ready Home (ZERH) guidelines. The developer must have basis in the development during construction and sell or lease the dwelling units to homeowners or tenants for use as a residence.

Multifamily projects must also meet prevailing wage standards to receive the highest credit available.

This involves ensuring all laborers and mechanics employed in construction, alteration or repair are paid wages at rates determined by the Department of Labor. Developers must also meet specific recordkeeping requirements to maintain payroll records reflecting the hours worked in each classification and the actual wages paid.

What Types of Energy Efficiency Improvements Qualify?

To qualify for the 45L Tax Credit, properties must include energy-efficient features that meet strict standards. Key improvements include:

• Exterior doors, windows and skylights meeting ENERGY STAR® requirements
• Insulation and air-sealing materials that enhance overall energy efficiency
• High-efficiency HVAC systems compliant with ENERGY STAR® or Zero Energy Ready Home (ZERH) standards
• Energy-efficient water heaters using natural gas, propane or oil
• High-efficiency furnaces and boilers powered by natural gas, propane or oil

How Does the 45L Tax Credit Interact With Other Tax Incentives?

Developers can claim the 45L Tax Credit along with other federal tax incentives to maximize savings.

For example, it can be combined with the  on all buildings that are four stories or greater.

The credit is also compatible with the Low-Income Housing Tax Credit (LIHTC), and claiming the 45L Tax Credit does not lower eligible basis for LIHTC calculations, preserving the full value of both incentives.

The 45L Tax Credit does not preclude developers from claiming other federal tax credits, such as those for renewable energy installations or further energy-efficiency upgrades.

What Documentation Is Needed To Claim the Credit?

To claim the 45L Tax Credit, developers must provide thorough documentation demonstrating eligibility and compliance. Here’s a list of forms and documents you may need:

• IRS Form 8908 is used to officially claim the 45L Tax Credit on your tax return.
• Third-party certification/audit documentation verifying the property meets required energy efficiency standards
• Energy audit reports from certified auditors confirming energy performance improvements
• Receipts and invoices for energy-efficient installations/improvements confirming the materials and systems purchased and installed meet the credit requirements
• Records showing compliance with additional requirements, such as payroll records to verify compliance with prevailing wage standards

What Is Involved in Third-Party Certification?

Third-party certification ensures the property meets the required energy efficiency standards. A qualified third-party professional, such as a certified energy rater, performs on-site testing and energy modeling to verify compliance with programs like ENERGY STAR or ZERH.

This process includes evaluating elements like insulation, HVAC systems and air sealing to confirm they meet or exceed efficiency benchmarks. With the extensive inspection and process documentation requirements, it is imperative to have your third-party certifier as part of your team before construction begins.

Learn More About the 45L Tax Credit

The 45L Tax Credit can increase your project’s profitability while contributing to environmental responsibility. However, navigating the requirements can be complex.

To learn more, connect with your Warren Averett advisor directly or ask a member of our team to reach out to you to get the conversation started.