Increased Tax Credits for LIHTC Developers
By: Nate Jordan, Robin Redding, Jennifer Burris
Beginning in 2023, multifamily residential property developers can access expanded tax credits related to the construction of qualifying energy efficient units. Internal Revenue Code Section 45L, which previously provided for some energy efficient credits, was expanded via the Inflation Reduction Act of 2022 signed into law by President Biden on August 16, 2022. In addition to retroactively extending the Section 45L credits in place that expired in 2021, the Inflation Reduction Act also increased the Section 45L credits and updated the qualification requirements to claim those credits for 2023 through 2032.
Where We’ve Been
Prior to 2023, the Section 45L credit for eligible contractors was either $1,000 or $2,000 per qualifying dwelling unit. The amount of the credit was based on the level of energy efficiency standards met for qualified new energy efficient homes and qualified new energy efficient manufactured homes. The credit, which was calculated and claimed on the eligible contractor’s Form 8908 (“Energy Efficient Home Credit”), was dependent on a certification of energy standards met and acquisition of the qualifying dwelling unit by a person for use as a residence during the tax year the credit was claimed. Additionally, the taxpayer’s basis in the property was reduced by the amount of credit claimed. This basis reduction also applied to eligible basis for Section 42 (Low-Income Housing Credit) properties.
Where We Are
Beginning in 2023, eligible contractors can claim increased Section 45L credits if certain energy efficiency criteria are met. For both single-family and manufactured homes, the credit has been expanded to $5,000 per unit if it meets the Zero-Energy Ready Home US Department of Energy (DOE) Standard or $2,500 if the unit meets ratings for the ENERGY STAR Single Family New Homes program. For multifamily properties, a prevailing wage requirement is an additional requirement to qualify for the highest amount of Section 45L credit. A qualified dwelling unit in a multifamily property will generate a $5,000 credit if it is both a new certified Zero-Energy Ready Home (based on the Department of Energy’s standards) and it meets prevailing wage requirements or a $2,500 credit if it is both ENERGY STAR Multifamily Certified and it meets prevailing wage requirements. The prevailing wage requirements stipulate that laborers or mechanics employed by the developer or any contractor during the construction of the residence (and within a 10-year period) are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality where the residence is located as most recently determined by the US Secretary of Labor.
For developers of multifamily homes that do not meet the prevailing wage requirements, credits are limited to $1,000 for new Zero-Energy Ready Homes and $500 for ENERGY STAR Multifamily Certified homes that are leased to a person for use as a residence during the tax year the credits are claimed. Additionally, the taxpayer’s (developer’s) basis in the property is reduced by the amount of credits claimed, except in the case of Low-Income Housing Tax Credit (LIHTC) properties. For those properties, eligible basis is not reduced by the 45L credits claimed. The Section 45L credit continues to be calculated and claimed on Form 8908. Independent certification that energy efficiency requirements are met is necessary to claim credits.
To illustrate the changes to and current status of the Section 45L tax credits, consider the following example:
| 100 Unit Multifamily LIHTC Property All Units Certified as Zero-Energy Ready Homes $10,000,000 Building Basis |
Pre-2023 | Post-2022, Prevailing Wage Satisfied | Post-2022 Prevailing Wage Not Satisfied |
| Total Developer Section 45L Credits | $200,000 | $500,000 | $100,000 |
| Depreciable Basis | $9,800,000 | $10,000,000 | $10,000,000 |
| Low-Income Housing Tax Credit Basis | $9,800,000 | $10,000,000 | $10,000,000 |
Where We’re Going
The expansion of the Section 45L tax credit provides opportunities to developers through 2032. For more information, or to discuss how Section 45L may benefit you, reach out to BRC.
The information contained in this article is for informative purposes only and should not be relied on when making any business, legal, or other decisions. This information may be updated without notice and/or may not contain the most current information that is available related to this topic. Please consult with your advisor to determine how this information applies to your specific facts and circumstances.