What Is the Section 45L Energy Efficient Home Credit?
For homebuilders, this guide covers the Section 45L credit, from meeting technical energy standards to navigating the tax compliance process.
The Section 45L tax credit is a federal incentive for contractors and developers who construct or substantially reconstruct energy-efficient homes. While established in 2005, the Inflation Reduction Act of 2022 significantly increased the credit’s value, extended it through 2032, and updated its technical standards. The credit encourages the construction of homes that reduce energy consumption. It applies to single-family, multi-family, and manufactured homes sold or leased for residential use.
Determining Eligibility for the Credit
To qualify for the Section 45L credit, two conditions must be met. The claimant must be an “eligible contractor,” defined as the person or entity who constructed the home and owned it or had a basis in it during construction. This means the entity that bears the financial risk of the project is the one who can claim the credit. This distinction is important; a general contractor hired by a developer is not the eligible contractor unless they also own the property.
A property must be a “qualified energy-efficient home,” located in the United States and acquired from the eligible contractor for use as a residence. For homes acquired after December 31, 2022, qualification requires meeting energy-saving standards set by one of two federal programs. The first pathway is to meet the requirements of the applicable ENERGY STAR program, such as the ENERGY STAR Residential New Construction Program or the ENERGY STAR Manufactured Home National Program.
The second, more stringent pathway involves certification under the Department of Energy’s (DOE) Zero Energy Ready Home (ZERH) program, which requires a higher level of energy performance than the ENERGY STAR standards. The specific version of the ENERGY STAR or ZERH program that must be met depends on the date the home is acquired by the resident.
Credit Amounts and Basis Adjustments
For single-family and manufactured homes acquired from 2023 through 2032, contractors can claim a $2,500 credit for each unit that meets ENERGY STAR program requirements. If a home meets the higher standards of the DOE Zero Energy Ready Home program, the credit amount increases to $5,000 per unit.
For multi-family dwelling units, a base credit of $500 per unit is available for meeting ENERGY STAR standards, and a $1,000 credit per unit is available for meeting ZERH standards. These amounts increase significantly if the project meets federal prevailing wage requirements. If these wage standards are met, the credit for an ENERGY STAR-certified unit becomes $2,500, and the credit for a ZERH-certified unit becomes $5,000, mirroring the amounts available for single-family homes.
Claiming the Section 45L credit requires a basis adjustment. The eligible contractor must reduce their cost basis in the property by the amount of the tax credit claimed. For example, a $5,000 credit reduces the property’s tax basis by $5,000. This adjustment increases the taxable gain or reduces the deductible loss when the property is sold.
Required Certification and Documentation
To claim the Section 45L credit, the home’s energy efficiency must be verified by a qualified third-party certifier. This certifier must be an individual or organization not related to the contractor. They must also meet the qualification requirements established by the ENERGY STAR or DOE Zero Energy Ready Home program used for certification.
The verification process often involves using specialized software and may include on-site inspections to ensure the home was constructed to meet the required energy-efficient design standards. Upon successful verification, the certifier provides the eligible contractor with a formal certification for each qualifying dwelling unit. This certification is the evidence required by the IRS. It must be completed before the contractor can claim the credit on their tax return.
Claiming the Credit on Your Tax Return
The eligible contractor must use IRS Form 8908, Energy Efficient Home Credit, to calculate and report the credit. This form is filed as part of the contractor’s annual income tax return.
The contractor transfers the information from the third-party certifications onto Form 8908. The form requires details for each qualified home, including its full address and the credit amount being claimed for that unit. The total credit from all qualifying homes is calculated on this form.
The completed Form 8908 is attached to the contractor’s main tax filing, such as a Form 1040, 1120, or 1065. The total credit amount from Form 8908 flows through to the appropriate line on the primary tax return, reducing the contractor’s overall tax liability. It is important to retain all certification documents with your tax records.