Expanded Tax Credits Available to Qualifying Residential New Home Builders, Contractors by Adam Fisher, CPA
Posted on February 07, 2024
by
Adam Fisher
The Inflation Reduction Act of 2022 (IRA) amended Section 45L of the U.S. Tax Code by expanding the Energy Efficient Home (EEH) credit available to builders and other contractors that construct or substantially reconstruct new single-family homes and multifamily structures after Dec. 31, 2023, and on or before Dec. 31, 2032, that meet specific energy efficiency standards. The credit, which can be as high as $5,000 per home, incentivizes contractors to build dwellings using energy-efficient and sustainable products to the latest standards and pass the resulting energy cost savings onto future homeowners.
Eligibility Criteria
Eligibility for the credit applies to contractors that build, reconstruct or rehabilitate single-family and multifamily homes, assisted living facilities and student housing that are registered with and meet the minimum clean energy standards of the Environmental Protection Agency’s (EPA) Energy Star program and the Department of Energy’s Zero Energy Ready Home (ZERH) program. These energy efficiency requirements, which vary based on property type, location and year of permitting, include using energy-efficient building materials and installing Energy Star-rated equipment.
Each property must also undergo an inspection of its home energy rating by a certified Residential Energy Services Network (RESNET) professional before it receives a certificate of occupancy and is sold to an individual homeowner.
Calculating the Credit
For tax years 2023 through 2032, the value of the EEH credit can range from $500 to $5,000 per home “constructed by an eligible contractor and acquired by a person from such eligible contractor for use as a residence during the taxable year.”
The actual dollar value of the credit depends on the type of home built and the energy efficiency of each dwelling. Contractors working on multifamily buildings must also meet prevailing wage requirements by ensuring they pay wages to all laborers and mechanics employed on a project at rates that are not less than the prevailing rates determined by the Department of Labor for the type of work performed in the project’s geographic area. The prevailing wage requirement does not apply to single-family homebuilders.
The tax code breaks down the maximum credit availability to include up to $2,500 for each dwelling that meets or exceeds the Energy Star requirements and up to $5,000 per dwelling that meets or exceeds the ZERH benchmarks. The tax credit for homes acquired before 2023 is between $1,000 and $2,000, depending on the actual energy savings realized.
Based on the strict eligibility requirements of the EEH tax credit, which can yield millions of dollars in tax credits, it behooves builders and contractors to begin tax planning under the guidance of experienced tax professionals before starting construction. Taxpayers should also recognize that they can go as far back as 2020 to claim Section 45L tax credits on amended tax returns under the previous rules, which did not have prevailing wage requirements for multi-family developers. Finally, there may be additional opportunities for residential property builders and contractors to leverage the IRA’s expanded Section 179D Energy Efficient Commercial Building Tax Deduction for energy improvements to a building’s envelope (I.e., roof, walls, windows and doors) and individual systems or retrofit property.
About the Author: Adam Fisher, CPA, is an associate director of Real Estate Tax Services with Berkowitz Pollack Brant, where he helps property developers, contractors and owners to improve cash flow through and maximize tax efficiency through a variety of tax credits and deductions. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or info@bpbcpa.com.
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