Affordable housing developers benefit from various tax credits from Low-Income Housing Tax Credits to Rehab Credits yet they still fail to claim a tax credit that is often geared towards their developments: the Section 45L Tax Credit. Section 45L is a commonly overlooked section of the tax code that rewards energy efficient dwelling units with a $2,000 federal tax credit per eligible unit. Understanding how this specific tax credit works can lead to improved returns for both affordable housing developers and investors, especially since affordable housing typically requires more investment in energy efficiency.
What’s Causing the Lack of Awareness?
Part of the reason that 45L tax credits are often missed is that the multifamily industry was originally not considered eligible for this tax credit when it was first introduced into the tax code in 2006. Initial guidance on the tax credit required that homes had to be sold in order to be eligible, and this tax credit was originally referred to as the “homebuilder tax credit.” However, the IRS clarified its initial guidance in 2008 by allowing homes that have been sold or leased to be eligible for the credits. With the modified guidance, units within low-rise multifamily buildings became eligible for this tax credit.
Additionally, the tax credit has always been a tax extender which has been extended retroactively many times since it was first introduced. Given that the tax credits had constantly expired only to be extended at a later time made it challenging for developers to monitor the tax credit and plan for it appropriately. Over the years, tax practitioners have had to notify developers of the extension of the tax credits and remind them of their eligibility.
With the lack of awareness, developers may have missed out on tax credits when filing their original tax returns. The good news is that the tax credit can be claimed retroactively as long as tax returns are amended within 3 years of the original filing date. Essentially, developers that have first leased units in 2013 through the end of 2016 are currently eligible. However, the window for claiming credits for 2013 is quickly closing as the statute for amending 2013 tax returns will expire sometime this year for most taxpayers.
Coordinating 45L Tax Credits with Low-Income Housing Tax Credits (“LIHTC”)
45L tax credits are really geared towards affordable housing given that one of the requirements for housing to be considered affordable is that it be more energy efficient in order to result in lower utility bills for low-income tenants. When housing agencies are determining which developments are awarded LIHTC credits, part of the criteria often relies on gauging how energy efficient the housing will be. Affordable housing developers who plan to make their units more energy efficient than others put themselves in a better position to be awarded LIHTC credits. As a result, LIHTC projects are often built to be significantly more energy efficient than market rate projects making it easier for them to also qualify for 45L tax credits.
Given that a LIHTC deal is more complex than a market rate deal, there are many issues that developers must consider. Basis issues, investor appetite for additional tax credits, and the possibility of special allocations are just some of the other areas that need extra consideration when pursuing 45L tax credits. With proper planning and guidance, both developers and investors can navigate through the complexities that exist within affordable housing to reap additional rewards with the 45L tax credits.
Claiming 45L Tax Credits
The basis for claiming and supporting the 45L tax credit is a detailed energy analysis that must be certified by a qualified third-party. KBKG’s multi-disciplinary team of engineers and tax experts have the necessary qualifications for properly quantifying and certifying 45L tax credits. In addition to assisting 8 of the country’s top 10 builders to claim millions in 45L tax credits, KBKG has helped numerous other developers and their tax advisors in securing and maximizing the tax credit.
Author: CJ Aberin, CCSP