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Tax Extender for Certain Residential Energy Efficient Properties

Teri M. Samples

February 05, 2020

If you have sold or leased newly constructed residential units, or have made energy efficient improvements to residential real estate you could be eligible for a Federal tax credit. It is not too late to claim this benefit.

The recently enacted Extender Bill signed into law by President Trump in December 2019 has retroactively reinstated the §45L tax credit – which was set to expire at the end of 2017. This retroactive change provides an immediate tax benefit to certain residential building owners.

CASE STUDY

A Midwest-based real estate holding company completed a 70-unit multi-family project, fully leased in 2019.  This project had four stories, but the first level was below grade.  As such, the taxpayer can consider credits for all floors. In this project 65 of the 70 units were certified.

Note the benefit in this case study does not consider the tax effect due to the required reduction in basis of the property for future depreciation.  It also does not consider any increased construction costs incurred for energy efficient qualifications and measurements.

The details

IRC §45L provides for a $2,000 tax credit available to owners of qualifying residential property. The $2,000 tax credit applies per dwelling unit. To qualify, the residential units must be sold or leased after August 8, 2005 through 2020. The tax credit is claimed by the developer or eligible contractor owner in the year the unit is occupied. The §45L tax credit is a general business credit. Therefore, the IRS allows for a one-year carry-back and a 20-year carry-forward period for any unused credits to be applied against regular tax. The tax credit will reduce your Federal tax liability dollar for dollar.

Qualifying property must be U.S. residential and three stories or less above grade. To qualify, the unit should provide a level of energy-efficiency that is significantly less than certain energy standards depending upon the year the dwelling unit is leased or sold. Eligible construction also includes substantial renovations. If the apartment building is more than three stories above grade, it might be eligible for the §179D deduction instead of the §45L tax credit.

To claim the credit, the unit’s energy-efficiency must be certified by the Residential Energy Services Network (RESNET). Credits are realized by filing an amended tax return for the year the residential units were sold or leased. The statute of limitations for filing an amended tax return for that tax year must be open. 

The following types of projects can qualify:

  • Apartment buildings (less than 3 stories above grade)
  • Affordable housing
  • Assisted living facilities
  • Extended stay hotels
  • Student housing
  • Production home builders
  • Residential condominiums

Having a qualified team review your specifications could prove to be advantageous. The certification of these benefits requires an independent qualified third party to certify the energy savings and potential tax deductions and credits.

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