The 45L Energy Efficient Home Tax Credit and How to Take Advantage it

September 15, 2015

When and why residential real estate developers should consider it

By Alexander Narcise

The Federal Section 45L Energy Efficient Home Tax Credit is relatively new and little known, but those who take advantage of it can reap substantial benefits.

Here are two examples of 45L tax outcomes:

After due diligence, a housing developer in Connecticut received a tax credit of $2,000 for each of its 144 units.
A 296-unit development in New Jersey is in the process of receiving a $592,000 tax credit for 2015.

To qualify for the Section 45L Credit, the entities had to construct or rehabilitate individual housing units to comply with energy efficiency standards. Compliance is determined through certification by an engineer hired to conduct a cost segregation study.

Different types of residential housing can qualify, including apartments, townhomes and detached houses. New and rehabbed housing both qualify, but construction standards are easier to meet with new housing.

The most obvious benefit to developers and real estate investors is the tax credit of up to $2,000 per unit. Some investors have relied, in part, on the Section 45L tax credit to provide funding for the construction of additional units in the same development. Another advantage is the higher quality standards of construction that must be maintained to earn the credit. Although meeting these standards raises construction costs, this expenditure is often offset by the increase in property values and lower energy costs.

Many developers and builders who have interest in the Section 45L credit are developing larger tracts of 50 units or more. Here are a few of the finer points you and your accountant should consider when thinking about the Section 45L credit.

The property must be no more than three levels in height.
The maximum tax savings per unit is $2,000.
The unit must be sold or leased for a credit to be realized.
The tax code is subject to annual reauthorization.
The tax savings are partially offset.

Alex goes more into depth in the full article here.

If you’d like to further explore the possible tax benefits of building or rehabbing your next residential property to Section 45L standards, contact your accountant. They will begin by auditing your plans and working with a cost segregation specialist to determine what you’d have to do to qualify for the Section 45L Energy Efficient Home Tax Credit.

As co-partner in charge of the Real Estate and Construction Services Group at Wiss & Company LLC, Alexander Narcise, CPA specializes in areas of accounting, audit and tax for family-owned real estate businesses. Reach him at [email protected].