Homebuilders & Multifamily Housing Developers May Generate Income Tax Credits
Author: Jeremy Carnahan
Homebuilders and developers of multifamily housing generally are required to recover inventory or improvement costs through cost of goods sold or over the property’s recovery period through annual depreciation deductions. However, to encourage and promote energy conservation, certain construction and development of energy-efficient dwelling units may qualify for income tax credits.
Under Internal Revenue Code Section 45L, “eligible contractors” may generate a $2,000 income tax credit for the construction of a “qualified new energy efficient home” sold or leased as a residence during the taxable year. The $2,000 income tax credit is available for “dwelling units” meeting certain energy-efficiency standards.
Note: While manufactured housing producers may be eligible for the $2,000 or reduced $1,000 income tax credit, this article is aimed at homebuilders and developers of multifamily housing.
An “eligible contractor” is the person who constructed the qualified new energy-efficient home. IRS Notice 2008-35 clarifies that a person must own and have a basis in the qualified energy-efficient home during its construction to qualify as an eligible contractor with respect to the home. If a taxpayer hires a third-party contractor to construct the home but owns and has basis in the home during its construction, the person hiring the contractor is the eligible contractor, not the third party.
A “qualified new energy efficient home” is a dwelling unit meeting these requirements:
- Located in the U.S.
- Construction substantially completed after January 1, 2006
- Certified in accordance with the tax law to have a level of annual heating and cooling energy consumption at least 50 percent less than the annual level of heating and cooling energy consumption of a comparable dwelling unit constructed in accordance with the standards of Chapter 4 of the 2006 International Energy Conservation Code in effect on January 1, 2006, and for which the heating and cooling equipment efficiencies correspond to the minimum allowed under the regulations established by the U.S. Department of Energy pursuant to the National Appliance Energy Conservation Act of 1987 and in effect at the time of completion of construction
- Containing building envelope component improvements that account for at least one-fifth of the aforementioned reduction in energy consumption
Construction of eligible dwelling units includes both new construction and substantial reconstruction and rehabilitation projects. A dwelling unit is acquired from an eligible contractor for use as a residence if the person who constructed the home sells or leases the home to another person for use as a residence.
For purposes of this tax credit, a “dwelling unit” is a single unit providing completely independent living facilities for one or more persons, including permanent provisions for living, sleeping, eating, cooking and sanitation, within a building not more than three stories above grade in height.
Section 45L, as currently written, expired December 31, 2014. However, the credit could be extended through 2015 as part of the tax extenders package expected to be passed before year-end.
Claiming the Credit
To claim the income tax credit, the eligible contractor must have certification that the required energy savings will be achieved. This certification must be obtained from an individual, unrelated to the taxpayer, who has been accredited or otherwise authorized by RESNET to use energy performance measurement methods and who represents in writing to the taxpayer that he or she has the qualifications to provide the certification required or perform the inspection and testing.
If the $2,000 income tax credit is generated, the basis of such property is reduced by the amount of the credit.
Past Projects May Still Qualify
Past dwelling units leased or sold may qualify for the income tax credits. These credits must be claimed on the tax return for the year they were purchased from the taxpayer. As such, any amendable tax return is eligible for consideration. In general, taxpayers can amend the prior three years’ tax returns to claim this credit.
The income tax credit available to eligible contractors provides additional incentive for production of qualified new energy-efficient homes. In addition to reducing future energy and power costs, the eligible contractor can generate valuable income tax credits provided by Section 45L. If you’ve constructed qualified new energy-efficient homes in the past three years, contact your BKD advisor to discuss whether you qualify for the Section 45L income tax credit.