How the 45L Energy Tax Credit Can Save Real Estate Developers Thousands in Taxes?

The 45L Energy Tax Credit is a powerful incentive for builders and developers constructing energy-efficient residential properties. This credit, part of the Inflation Reduction Act (IRA) of 2022, was extended and enhanced to encourage sustainable building practices. If you’re a developer, builder, or investor in residential real estate, understanding this credit could save you thousands—or even millions—of dollars in taxes.

Important Insights

• The 45L Tax Credit offers up to $5,000 per unit for Energy Star or ZERH homes.
• The 2022 IRA enhanced the credit, benefiting multifamily projects with prevailing wages.
• Pairing 45L with cost segregation boosts tax savings through accelerated depreciation.
• Claiming requires third-party certification, IRS Form 8908, and tax professional guidance.

Table of Contents

• Important Insights
• What Is the 45L Energy Tax Credit?
• Key Changes to the 45L Tax Credit Under the Inflation Reduction Act
• Who Qualifies for the 45L Tax Credit?
• Maximizing Your Tax Savings with Cost Segregation & 45L Tax Credit
• How to Claim the 45L Energy Tax Credit
• Final Thoughts

What Is the 45L Energy Tax Credit?

The 45L Energy-Efficient Home Credit provides up to $5,000 per dwelling unit for newly constructed or substantially renovated energy-efficient homes that meet specific Energy Star and Zero Energy Ready Home (ZERH) standards.

This credit applies to:

• Single-family homes
• Multifamily properties
• Manufactured homes
• Residential portions of mixed-use buildings

For years prior to 2023, the credit was capped at $2,000 per dwelling unit and required homes to meet certain 2006 International Energy Conservation Code (IECC) standards. However, the Inflation Reduction Act introduced significant updates that make the credit more lucrative.

Key Changes to the 45L Tax Credit Under the Inflation Reduction Act

Starting in 2023 and beyond, the credit now offers two tiers of incentives:

1. Energy Star Certified Homes

• Single-Family Homes: $2,500 per dwelling unit
• Multifamily Homes: $500 per dwelling unit
• Multifamily Projects Following Prevailing Wage Requirements: $2,500 per unit

2. Zero Energy Ready Homes (ZERH) Certified

• Single-Family Homes: $5,000 per dwelling unit
• Multifamily Homes: $1,000 per dwelling unit
• Multifamily Projects Following Prevailing Wage Requirements: $5,000 per unit

The biggest benefit? Developers of multifamily housing who meet prevailing wage requirements can now claim up to $5,000 per unit, significantly increasing their tax savings.

Who Qualifies for the 45L Tax Credit? ✅

To qualify for the 45L credit, builders and developers must ensure their properties meet the latest Energy Star or ZERH standards, which consider factors such as:

• High-efficiency HVAC systems
• Advanced insulation & air sealing
• Energy-efficient lighting & appliances
• Solar & renewable energy integration

A qualified third-party energy consultant must certify that the property meets these energy efficiency standards before claiming the credit.

Maximizing Your Tax Savings with Cost Segregation & 45L Tax Credit

Pairing cost segregation studies with the 45L tax credit is a game-changer for real estate investors and developers. Here's how:

🔹 Accelerated Depreciation: Cost segregation helps investors front-load depreciation by classifying components of the building into 5, 7, or 15-year asset lives, instead of the standard 27.5 or 39 years.
🔹 Bonus Depreciation Stacking: The 100% bonus depreciation phase-out is reducing after 2023, but cost segregation still allows for major upfront deductions.
🔹 Tax Credit Stacking: If a building qualifies for both 45L credits and 179D energy deductions, investors can compound their tax benefits, further reducing taxable income.

By combining these tax strategies, real estate professionals can increase cash flow, lower tax liabilities, and reinvest in future developments.

How to Claim the 45L Energy Tax Credit

To claim the credit:

1. Ensure your project meets Energy Star or ZERH standards.
2. Obtain third-party certification from a qualified energy consultant.
3. File IRS Form 8908 with your tax return.
4. Work with a tax professional to maximize your deductions through cost segregation and other energy incentives.

With the 2023 enhancements, the 45L Energy Tax Credit has become an even more valuable tool for builders and investors looking to develop high-performance, energy-efficient housing while unlocking massive tax savings.

Final Thoughts

The 45L Energy Tax Credit isn’t just an incentive—it’s a strategic tool for developers committed to energy efficiency and financial optimization. By taking advantage of this credit, builders can enhance property value, attract eco-conscious buyers, and significantly reduce their tax burden.

Want to see if your development qualifies for 45L and other tax-saving strategies? Contact a cost segregation specialist today!