The Section 45L tax credit gives eligible contractors, homebuilders, landlords, and property developers a federal tax credit of up to $5,000 per dwelling unit for constructing or substantially reconstructing energy-efficient homes that meet specific certification standards.
Knowing whether your property qualifies — and how much you can claim — can significantly reduce your federal tax liability and improve the financial return on energy-efficient construction projects.
This guide covers who qualifies for Section 45L, how credit amounts are calculated, which energy standards apply, and exactly how to claim the credit on your return.
What Is the Section 45L Tax Credit?
Section 45L is a federal tax credit established under the Internal Revenue Code that rewards eligible contractors for building or substantially reconstructing residential dwelling units that meet defined energy efficiency thresholds. The credit was significantly expanded and extended through the Inflation Reduction Act of 2022, which increased credit amounts and tied qualification to recognized certification programs through 2032.
The credit applies per dwelling unit — meaning a developer building a 20-unit apartment complex can claim the credit for each qualifying unit individually. This makes Section 45L particularly valuable for multifamily developers, landlords constructing new rental properties, and homebuilders working at scale.
Who Qualifies as an Eligible Contractor?
An eligible contractor under Section 45L is the person or business that owns the dwelling unit at the time of construction and sells or leases it to another party. This typically includes homebuilders, real estate developers, and landlords who construct new residential units for sale or rent. Homeowners who build their own primary residence generally do not qualify unless they meet the ownership and sale requirements defined by the IRS.
What Properties Are Covered?
Section 45L applies to residential dwelling units located in the United States, including single-family homes, townhomes, condominiums, and multifamily apartment buildings of three stories or fewer above grade. Manufactured homes that meet HUD code standards are also eligible. The dwelling unit must be acquired for use as a residence, and the construction or substantial reconstruction must be completed within the applicable tax year.
How Much Can You Claim Under Section 45L?
The credit amount under Section 45L depends on the type of dwelling unit and the level of energy efficiency certification achieved. The IRS guidance on Section 45L outlines the current credit tiers in effect through 2032 under the Inflation Reduction Act framework.
Credit Amounts for Single-Family Homes
For single-family homes and manufactured homes, the credit tiers are:
- $2,500 per unit for homes that meet ENERGY STAR Single-Family New Homes certification standards
- $5,000 per unit for homes certified as Zero Energy Ready Homes (ZERH) under the Department of Energy program
The higher $5,000 credit reflects the more rigorous energy performance requirements of the ZERH program, which demands significantly greater efficiency than standard ENERGY STAR certification.
Credit Amounts for Multifamily Buildings
For multifamily dwelling units, the credit structure is:
- $500 per unit for units meeting ENERGY STAR Multifamily New Construction certification
- $1,000 per unit for units certified as Zero Energy Ready under the DOE program
- $2,500 per unit for ENERGY STAR-certified units where prevailing wage requirements are met
- $5,000 per unit for ZERH-certified units where prevailing wage requirements are met
The prevailing wage requirement means all laborers and mechanics employed in construction must be paid wages at rates not less than the prevailing rates for similar work in the locality, as determined by the Secretary of Labor.
Energy Efficiency Standards Required to Qualify
Meeting Section 45L’s credit thresholds requires third-party certification from a recognized program. The two primary certification pathways are ENERGY STAR and the Department of Energy’s Zero Energy Ready Home program.
ENERGY STAR Certification Requirements
ENERGY STAR certification for new homes is administered by the U.S. Environmental Protection Agency and requires homes to meet a defined set of thermal enclosure, HVAC, water heating, and lighting efficiency standards. Homes must be verified and field-tested by a certified ENERGY STAR rater. The specific version of the ENERGY STAR program that applies depends on the climate zone and construction date, and builders must use the version in effect at the time of permit application.
Zero Energy Ready Home (ZERH) Standards
The DOE Zero Energy Ready Home program sets a higher performance bar, requiring homes to be so energy efficient that a renewable energy system could offset most or all of the home’s annual energy consumption. ZERH certification requires meeting ENERGY STAR prerequisites plus additional requirements for insulation, windows, air sealing, HVAC efficiency, and water heating. A DOE-approved rater must verify and certify the home before the credit can be claimed.
How to Claim the Section 45L Tax Credit
Claiming Section 45L requires completing the correct IRS form and attaching the required certification documentation to your federal tax return. The process has specific steps that must be followed in the correct order to avoid disqualification.
Documentation and Certification Process
Before filing, the eligible contractor must obtain a written certification from a qualified third-party certifier confirming the dwelling unit meets the applicable energy efficiency standard. This certification must be completed before the tax return is filed and must identify the specific certification program, the version used, and the dwelling unit address. The IRS Form 8908 is the required form for claiming the credit, and the certification documentation must be retained and available for IRS review.
Before filing your credit, confirming your project meets all required benchmarks is critical — our guide to 45L efficiency standards covers every certification threshold and documentation requirement in detail.
Filing the Credit on Your Tax Return
The Section 45L credit is claimed using IRS Form 8908, Energy Efficient Home Credit, which is attached to the eligible contractor’s federal income tax return. The credit is a general business credit and is subject to the general business credit limitations under IRC Section 38. Any unused credit can be carried back one year and carried forward 20 years. Partnerships and S corporations pass the credit through to their partners and shareholders, who then claim it on their individual returns.
Section 45L and Home Improvement Projects
Section 45L is primarily a new construction credit, but it also applies to substantial reconstruction and rehabilitation of existing dwelling units. A dwelling unit qualifies under the reconstruction pathway when the cost of the reconstruction exceeds 50% of the cost of acquiring the building, excluding land. This means significant gut-renovation projects on older properties can qualify if the reconstructed unit meets the required energy certification standards.
For property managers and landlords investing in major energy upgrades, understanding how Section 45L fits within a broader property investment strategy is essential. Understanding how Section 45L interacts with your broader property decisions is essential — our home investment analysis breaks down how energy-efficient construction choices affect long-term property value and return on investment.
Which Upgrades Help Meet 45L Standards?
While Section 45L applies to the whole-home certification rather than individual upgrades, specific improvements directly contribute to meeting ENERGY STAR or ZERH thresholds. High-performance insulation and air sealing are typically the most impactful improvements for meeting the thermal envelope requirements. HVAC system upgrades to high-efficiency heat pumps or variable-speed systems, low-U-factor windows and doors, and energy-efficient water heaters all contribute to the overall energy performance score. Working with a certified energy rater early in the project helps identify which specific upgrades are needed to reach the target certification level.
Section 45L vs. Other Energy Tax Credits
Section 45L is one of several federal energy tax incentives available to homeowners, builders, and property investors. Understanding how it differs from related credits prevents missed opportunities and avoids double-counting errors on your return.
Section 25C (Energy Efficient Home Improvement Credit) applies to existing homeowners making specific improvements to their primary residence, such as insulation, windows, doors, and HVAC systems. Unlike 45L, which targets eligible contractors, 25C is claimed by the homeowner directly and is capped at $1,200 per year for most improvements, with a separate $2,000 cap for heat pumps.
Section 25D (Residential Clean Energy Credit) covers solar panels, solar water heaters, battery storage, and other clean energy installations on a primary or secondary residence. It provides a 30% credit on the cost of qualifying systems through 2032. Unlike 45L, 25D is available to homeowners — not contractors — and applies to clean energy generation rather than overall building efficiency.
Section 179D applies to commercial buildings and certain multifamily properties of four stories or more above grade, making it the commercial counterpart to 45L for larger developments.
Homeowners pursuing multiple improvements can stack several incentives — our overview of energy upgrade tax benefits explains how Section 25C, 25D, and 45L credits work together without overlap.
Conclusion
The Section 45L tax credit provides a meaningful financial incentive for builders, developers, and landlords who construct or substantially reconstruct energy-efficient residential properties meeting ENERGY STAR or Zero Energy Ready Home standards.
Claiming the full credit — up to $5,000 per unit — requires early planning, third-party certification, and proper documentation filed with IRS Form 8908 before the return deadline.
At Mr. Local Services, our network of skilled professionals can help you identify and complete the energy-efficient upgrades needed to meet 45L certification thresholds — contact us today to get started.
Frequently Asked Questions
What is the maximum Section 45L credit per dwelling unit?
The maximum Section 45L credit is $5,000 per dwelling unit for homes certified as Zero Energy Ready under the DOE program. Single-family ENERGY STAR-certified homes qualify for $2,500 per unit, while multifamily units have separate tiers based on certification level and prevailing wage compliance.
Can a homeowner claim the Section 45L credit?
No. Section 45L is available only to eligible contractors — the person or business that owns the dwelling unit during construction and sells or leases it to another party. Homeowners who build their own primary residence for personal use generally do not qualify for this credit.
Does Section 45L apply to rental properties?
Yes. Eligible contractors who construct new rental dwelling units that meet the required energy efficiency certification can claim the Section 45L credit, provided the unit is leased for use as a residence. Multifamily rental buildings of three stories or fewer above grade are specifically covered under the program.
What form is used to claim the Section 45L credit?
The Section 45L credit is claimed using IRS Form 8908, Energy Efficient Home Credit. This form must be attached to the eligible contractor’s federal income tax return for the year in which the qualifying dwelling unit is sold or leased.
Does the Inflation Reduction Act change Section 45L?
Yes. The Inflation Reduction Act of 2022 significantly updated Section 45L by increasing credit amounts, tying qualification to ENERGY STAR and Zero Energy Ready Home certification programs, and extending the credit through December 31, 2032. The prevailing wage bonus credit for multifamily units was also introduced under the IRA framework.
Can the Section 45L credit be carried forward?
Yes. Because Section 45L is a general business credit under IRC Section 38, any unused credit can be carried back one year and carried forward up to 20 years. This makes the credit valuable even in years when the eligible contractor’s tax liability is lower than the total credit earned.
What is the difference between ENERGY STAR and Zero Energy Ready Home for Section 45L purposes?
ENERGY STAR certification requires homes to meet defined efficiency standards verified by a certified rater, qualifying for a $2,500 credit per single-family unit. Zero Energy Ready Home certification requires a higher performance level — including all ENERGY STAR prerequisites plus additional requirements — and qualifies for the maximum $5,000 credit per unit.