Newer Buildings Offer Significant Energy Efficiency Tax Benefits

The New Energy Efficient Home Tax Credit was established by the Energy Policy Act of 2005. It has since been extended through 2011. The builder or eligible contractor of a new or substantially rehabilitated or reconstructed energy-efficient home is eligible for a tax credit of up to $2,000 for each home or dwelling unit.

Over the past several years, energy efficiency has become big news. One such incentive, the New Energy Efficient Home Tax Credit (45L), has created an opportunity for the owners and developers of multifamily residential structures—including apartment buildings, condominiums, student housing, and senior living complexes—to potentially obtain large tax credits.

The New Energy Efficient Home Tax Credit was established by the Energy Policy Act of 2005. It has since been extended through 2011. The initial legislation and subsequent extensions provide that under Code Section 45L the builder or eligible contractor of a new or substantially rehabilitated or reconstructed energy-efficient home is eligible for a tax credit of up to $2,000 for each home or dwelling unit.

To qualify for the tax credit, the home or dwelling unit must meet the following criteria:

·     Is located in the United States.
·     Construction was substantially completed after August 8, 2005.
·     Has been purchased or leased from the eligible contractor after December 31, 2005 and before January 1, 2012, for use as a residence.

For purposes of the New Energy Efficient Home Credit, a dwelling unit is a single unit providing a complete independent living facility for one or more persons, including permanent provisions for living, sleeping, eating, cooking, and sanitation within a building that is no more than three floors above grade. The term “eligible contractor” is used to define either the individual who constructed the new energy-efficient home and/or a person who owns or has basis in the home or dwelling units during construction.

In order to qualify for the credit, the dwelling unit must show at least a 50 percent reduction in heating and cooling energy consumption when compared to units constructed in accordance with the 2003 standard. Based on current construction trends and local and national building codes and guidelines, many new developments already meet or exceed these standards.

Good candidates for the credit include homes or dwelling units that have a combination of some of the following characteristics and equipment:

·     Air conditioning with a SEER rating of 13 or higher.
·     Heater efficiency of 85 percent or higher.
·     Heat pump systems, hydronic heating systems, and geo-thermal systems.
·     Insulation with a relative high R Value in the walls, attics, and foundation spaces.
·     Vinyl windows with a low U-factor and SHGC.
·     High-efficiency or tankless water heaters.
·     Photovoltaic.

Qualification also requires the contractor to have the unit’s energy efficiency certified by an approved third-party rater who has been qualified by the Residential Energy Services Network (RESNET). The RESNET rater conducts computer modeling and on-site testing to verify the home’s energy efficiency. The economics of the 45L tax credit are compelling—especially for owners and investors in multifamily developments—due to the fact that the $2,000 credit is earned for each qualifying unit, i.e. apartment or condo. For example, for a completed 75-unit, two-story multifamily apartment asset in which 60 units qualify for the credit, the total credit would be $120,000 (60 units x $2,000).

Because of the significant savings the 45L credit could generate, residential developers and investors should consider this credit as part of their tax-reduction and building and rehabilitation strategies. It should be noted that the credit did expire as of December 31, 2011, but it may possibly be renewed for future years. It is available for past years and can be claimed via an amended tax return.

David E. North is a partner and the national leader of CliftonLarsonAllen’s Federal Tax Solutions practice. He has more than 24 years of experience with an emphasis on energy credits, cost segregation studies, fixed-asset depreciation studies, embedded cost reviews, and research and development tax credits studies.