A Year-End Gift for Homebuilders & Multifamily Developers
On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020 (Act) into law. While the Act addresses budget appropriations, it also extends several expired or expiring tax incentives, including the New Energy Efficient Home Credit (45L credit).
The 45L credit, which previously expired on December 31, 2017, allows the “eligible contractor” of a qualified new energy-efficient dwelling unit a $2,000 tax credit in the year that unit is sold or leased as a residence. The Act has extended the 45L credit retroactively for qualifying dwelling units initially sold or leased beginning on January 1, 2018, through December 31, 2020. Homebuilders of single-family homes or developers of low-rise multifamily developments may qualify as an eligible contractor for the 45L credit. For a developer of a low-rise multifamily development, the credit applies to each qualifying unit initially leased or sold during the year. For example, a developer that builds a 400-unit apartment complex and initially leases 300 units in 2019 and the remaining 100 units in 2020 would be eligible for $600,000 in 45L credits in 2019 and $200,000 in 45L credits in 2020. The focus of this article is on new developments, but some unit renovation projects also may qualify.
An eligible contractor is the person or entity who owns the qualified energy-efficient home during its construction. 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.
Eligible Dwelling Units
For a dwelling unit to qualify for the 45L credit, it must show a reduction of energy use by at least 50 percent when compared to the applicable standards in chapter 4 of the 2006 International Energy Conservation Code. At least one-fifth of the 50 percent energy efficiency must come from improved building envelope components. Multifamily developments must be three stories or fewer above grade to qualify for the credit. A $1,000 credit also may be available for energy-efficient manufactured homes. The manufactured home must show a reduction of energy use of at least 30 percent to qualify.
In addition to the energy efficiency requirements, the dwelling unit must be located in the U.S., be substantially constructed after December 31, 2005, and be initially leased or sold for use as a residence during the year the credit is claimed.
To qualify for the credit, the eligible contractor must obtain a certification for each unit by a qualified third-party certifier. An eligible certifier is a person not related to the eligible contractor who has been accredited or otherwise authorized by the Residential Energy Services Network (RESNET) or an equivalent rating network. The certifier conducts computer modeling and on-site testing and prepares a certification package. A certification report specific to the 45L credit should be completed prior to claiming the credit and maintained by the taxpayer.
Due to the nearly two-year gap between the expiration of this credit and the recent extension, a substantial backlog of certifications is expected. If you believe you qualify as the eligible contractor for energy-efficient dwelling units initially leased or sold in recent years or likely to be initially leased or sold in 2020, you should act quickly. An engineer can analyze the building plans to determine whether a building is likely to qualify for the 45L credit. BKD’s team of engineers and tax professionals can review the buildings in question and your role in the development to help you determine credit eligibility, calculate the credit and provide certification reports. For more information, reach out to your BKD Trusted Advisor™ or use the Contact Us form below.