IRS Issues New Guidance for 45L Tax Credit

Meeting energy-efficiency requirements can make projects eligible for the maximum amount of $5,000 per unit

The Internal Revenue Service (IRS) recently issued new guidance with Notice 2023-65, surrounding the 45L Tax Credit that impacts how single-family, multifamily, and manufactured homes qualify for this Green Building Tax Incentive. This notice defers to the certification process for both Energy Star and Zero Energy Ready Home (ZERH) programs and how developers must diligently adhere to those requirements to qualify for the credit.

The main purpose of the 45L initiative is for eligible developers (i.e., single and multifamily developers, condo developers, affordable housing developers, etc.) to be rewarded with reduced tax liabilities for constructing energy-efficient homes and units. Based on specific energy-efficiency standards set by the government, multifamily developers can qualify for up to $5,000 per apartment unit, depending on the efficiency levels the unit achieves.

Why Energy Star and ZERH Certification Matters

Projects looking to claim the credit must be Energy Star or ZERH Certified, as these programs help establish energy-efficient housing. By meeting these requirements, eligible developers (i.e., single and multifamily developers, condo developers, affordable housing developers, etc.) of eligible homes significantly increase the chances of claiming the credit and increasing cash flow through a reduction in tax liability.

Dwelling units that earn the Energy Star label meet strict criteria for insulation, windows, heating and cooling systems, and appliances. Adhering to these standards means developers have shown a commitment to reducing energy consumption, making the constructed properties environmentally friendly and cost-effective for homeowners and tenants.

While net-zero energy usage is not required, through the ZERH program, dwelling units are specifically designed to be future-ready to produce the same amount of energy as they will consume. With these energy consumption specifications in mind, developers effectively achieving a net-zero energy usage further qualify the eligible project to claim the 45L Tax Credit.

Qualifying for 45L

Qualifying for this credit requires homes meeting the energy criteria and either being sold to a homeowner or leased to tenants for use as a residence. Starting January 1, 2023, both single and multifamily developers can be eligible for the maximum value of up to $5,000 for each dwelling unit. 

To receive the maximum value of the 45L Tax Credit, developers must align projects with the criteria outlined by the Energy Star and ZERH programs. These programs set high standards for energy-efficient homes and sustainability, ensuring that qualified properties represent a significant leap forward in green building practices. 

How to Claim 45L

A third-party energy and tax consultant, such as KBKG, is required to certify a housing development’s qualification for this Green Building Tax Incentive. Engaging with tax professionals and energy consultants prior to the start of construction is a necessary step in the process. The consultation beforehand serves as an assessment of the development’s current design and ensures it follows the government’s energy standards. 

KBKG offers a team of experts, including Energy Star Certified and Energy Rated professionals, along with an in-house, multidisciplinary group of energy consultants, third-party verifiers, and industry-leading tax specialists. KBKG is one of the small lists of companies in the U.S. that is a trained rater for both single and multifamily homes nationwide. Prospective candidates interested in claiming the 45L Tax Credit should contact a KBKG expert for further guidance and support.