Tax Savings Opportunity for New Homebuilders

Sec. 45L Energy-Efficient New Home Credit

By Denise M. Holmes, CPA | Tax Partner | Real Estate & Construction Industry Team | January 2015

Southern Development Homes, a Charlottesville, Virginia homebuilder, is focused on conscious building. Their homes are designed to be durable and energy-efficient.  This energy-efficient approach has benefited the contractor in substantial tax savings by claiming the Sec. 45L energy-efficient new home tax credit on six of the homes the developer built-in 2014.  If your company is focused on energy-efficient home building, you may be eligible to take advantage of the tax credit.

What Makes a New Home Eligible for the Tax Credit?

• An eligible construction contractor can claim a credit for each qualified new energy-efficient home sold or leased to another person during the tax year for use as a residence. The credit (either $1,000 or $2,000) is based on the energy-saving requirements of the home and is part of the general business credit.  The credit is calculated on the Form 8908 – Energy Efficient Home Credit, and on Form 3800 – General Business Credit. The credit is not allowed against the tentative minimum tax.
• An eligible contractor is a person that constructed a qualified energy-efficient home or produced a qualified energy-efficient home that is a manufactured home. A person must own and have a basis in the qualified energy-efficient home during its construction to qualify as an eligible contractor with respect to the home.
• A qualified new energy-efficient home is a dwelling unit located in the United States, whose construction is substantially completed after August 8, 2005, and sold or leased to another person after 2005 but before December 31, 2014, for use as a residence.  There is no requirement in Code Sec. 45L that the property used as a residence be the person’s principal residence.  Thus, assuming the other requirements of Code Sec. 45L are satisfied, an eligible contractor can claim the credit for vacation homes that it constructs and that are acquired by other persons for use as second homes.
• All apartment buildings and residential condominium developments also qualify for the energy-efficient credit.  Any projects completed within the last 4 years are worth assessing for potential 45L tax credits.
• The home is also required to be certified and meet certain energy-saving requirements.  Construction includes substantial reconstruction and rehabilitation; however, the credit does not apply to a residence already owned by a taxpayer that is rehabilitated or substantially reconstructed by an eligible contractor.

How much is the credit?

The amount of the credit is based on the extent to which each new energy-efficient home meets the energy-saving requirements.

• The credit is $2,000 for a dwelling unit that is certified to have a level of annual heating and cooling energy consumption which is at least 50% below the annual level of heating and cooling energy consumption of a comparable dwelling unit and has building envelope component improvements that account for at least 1/5 of the 50% reduction in energy consumption.
• The credit is $1,000 for a manufactured home which conforms to Federal Manufactured Home Construction and Safety Standards and is certified to have a level of annual heating and cooling energy consumption which is at least 30% below the annual level of heating and cooling energy consumption of a comparable dwelling unit and has building envelope component improvements that account for at least 1/3 of the 30% reduction in energy consumption OR meets the requirements established by the Administrator of the Environmental Protection Agency under the Energy Star Labeled Homes program.

Other Considerations

• A comparable dwelling unit is considered constructed in accordance with the standards defined in the 2006 International Energy Conservation Code, has air conditioners with a Seasonal Energy Efficiency Ratio (SEER) of 13 and has heat pumps with a SEER of 13 and a Heating Seasonal Performance Factor (HSPF) of 7.7.
• The dwelling must generally be certified in accordance with guidance prescribed by IRS to have a projected level of annual heating and cooling energy consumption that meets the standards for either the 30% or 50% reduction in energy usage.  Certification should be made in writing, specifying in a readily verifiable fashion the energy efficient building envelope components and energy efficient heating or cooling equipment installed and their respective rated energy efficiency performance.
• If a credit is allowed under Section 45L in connection with any expenditure for any property, the increase in the basis of the property which would result from these expenditures, is reduced by the amount of the credit. This reduction in basis will increase the gain realized on the sale of the home by the amount of the credit.

Timeframe for Section 45L Tax Credit Eligibility

The credit currently does not apply to any qualified new energy efficient home acquired after December 31, 2014.  If a fiscal year eligible contractor could claim a credit with respect to any qualified new energy efficient home that was acquired by a person from the contractor for use as a residence in 2014 (i.e., after the credit had expired under pre-2014 Tax Increase Prevention Act law) and that contractor has already filed its income tax return for that period, the contractor may want to consider amending the return to claim the credit with respect to any payments made after 2013.

Do You Qualify for the Section 45L Tax Credit?

Our Real Estate & Construction Industry team assists many homebuilders, including Southern Development, with understanding and claiming the tax credit. We can help you determine eligibility.  Contact us: information@keitercpa.com | 804.747.0000

Background of Section 45L Energy Efficient New Home Credit

The federal Energy Policy Act of 2005 first established this tax credit. Initially scheduled to expire at the end of 2007, it was extended through 2008 by Section 205 of the Tax Relief and Health Care Act of 2006 (H.R. 6111), and then extended again through December 31, 2009 by Section 304 of The Energy Improvement and Extension Act of 2008 (H.R. 1424). The Tax Relief, Unemployment Insurance Reauthorization, and job Creation Act of 2010 (H.R 4853) again renewed the credit through December 31, 2011. After expiring at the end of 2011, the American Taxpayer Relief Act of 2012 retroactively renewed the credit effective January 1, 2012, expiring again on December 31, 2013. The bill was again retroactively renewed by the Tax Increase Prevention Act of 2014 (H.R. 5771) to December 31, 2014.