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Inflation Reduction Act Impact on Real Estate Industry

March 21, 2023

Attention real estate developers…are you up to speed on The Inflation Reduction Act and its impact on building? Read on for some important changes about Section 45L, New Energy Efficient Home Credit.

Have you read our blog, Biden Signs Inflation Reduction Act: What are the Key Tax Provisions? You’ll want to check it out for some valuable insight on the Inflation Reduction Act, passed in August 2022. The Act introduces many tax changes of which real estate developers will want to be aware.

Section 45L Energy Efficient Home Credit

Section 45L is a little-known tax credit that offers developers a means to offset the costs associated with building energy-efficient single family or multifamily properties. The credit provides a dollar-for-dollar offset against taxes owed or paid in the tax year in which the property is sold or leased.

The credit, set to expire in 2021, was extended through 2022 with the Act, and modified for years 2023 through 2032. The existing law allows for a $2,000 per unit tax credit for the construction of low-rise residential construction, defined as three stories or less. Eligible construction must be 50% more efficient than the International Energy Conservation Code (IECC).

What’s Changing?

The Act changes Section 45L beginning in 2023. One modification is that the measuring metric was moved from the IECC to Energy Star. An issue with this move is that although previously developers could complete a project prior to confirming the eligibility for the credit, Energy Star requires construction activities be within its requirements from the beginning of the project.

Secondly, the dollar amount to the credit per unit is adjusted as follows:

  • Single family homes meeting the standard = $2,500
  • Single family homes certified as zero energy ready = $5,000
  • Multifamily homes meeting the standard = $500
  • Multifamily homes certified as zero energy ready = $1,000

Increase in Credit Amount for Prevailing Wages

If prevailing wages, as published on the website, are paid to all contractors working on multifamily homes, a developer eligible for Section 45L can multiply the credit by 500%. That means a developer of a multifamily home certified as zero energy ready can deduct $5,000 per unit.

Who is Eligible?

The 45L credit is available to an eligible “contractor” in the year the certified dwelling units are leased or sold. For the purposes of 45L, a person or company must own and have basis in the qualified energy efficient home during the construction to qualify as the eligible contractor with respect to the home.

Questions? Contact us.

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