The energy efficient home credit—codified in Internal Revenue Code (IRC) Section 45L—has been extended from January 1, 2018, to December 31, 2020.
The credit provides $1,000 or $2,000 for newly contractor built—or substantially renovated—energy efficient, residential dwelling units that are purchased, leased, or rented from the contractor and used as a residence.
Eligible Contractors
An eligible contractor must meet both criteria:
- Constructed or substantially renovated the energy efficient residential dwelling unit
- Own and have a basis in the property during its construction
The eligible contractor definition also includes an individual, trust, estate, partnership, association, company, or corporation that hired a third-party contractor to complete the work if they also meet the above two criteria—such as ownership and basis during construction.
Defining Energy Efficient
A dwelling unit must first be tested and certified to have energy usage for heating and cooling that’s at least 50% less than a reference property in the same climate zone.
The dwelling unit’s building envelope components—insulation and energy-efficient windows, for example—must be responsible for at least 10% of the energy reduction.
Types of Qualifying Property
Properties that qualify include:
- Single-family homes
- Multifamily buildings, such as townhomes, condos, duplexes, and apartments—all of which must be three stories above grade or less
- House boats
- Trailer homes
- Manufactured homes, which qualify for a $1,000 with only a 30% energy reduction
Properties can be primary or vacation residences and must meet the following criteria:
- Be newly constructed or sustainably renovated
- Located in the United States
- Substantially completed between August 8, 2005, and December 31, 2020
Further Considerations
The energy efficient home credit is an IRC Section 38 general business credit that’s claimed on the contractor’s tax return for the year the dwelling units are leased or sold.
Accordingly, an eligible contractor could be able to amend open returns from previous years to claim the credit. The credit may carry forward 20 years.
Sampling is available for contractors that build more than 85 dwelling units per year or build subdivisions with the same floorplans using the same subcontractors.
Example
A residential construction company pulled a summary of home deliveries by subdivision and plan type, along with a sample of construction drawings and building code compliance related energy reports.
Reviewing the information with the help of a certified IRC Section 45L inspector quickly determined that many of the homes would qualify for the $2,000 per dwelling unit credit. After identifying additional data needs, working with the inspector, and modeling the homes based upon the drawings and client provided energy reports, additional data was required to meet the more stringent requirements for IRC Section 45L qualification.
The models were updated based upon the additional data, and approximately 60 homes were certified for the extended 2019 filing deadline. In addition, many of the 2019 certified homes were the same as units delivered in 2017 and 2018. Therefore, approximately 110 2017 and 2018 units could be certified.
Another 75 homes from 2017 and 2018 were certified based upon existing data and additional inputs from the HVAC contractor. A total of 185 homes, delivered in 2017 and 2018, were certified, and the credits were claimed on amended tax returns.
In all, tax credits with a total value just shy of $500,000 were certified for this eligible contractor.
We’re Here to Help
To see if your delivered dwelling units qualify for the energy home efficient credit, contact your Moss Adams professional.