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Increased Tax Credits for Home Builders

Published on: Published in: Taxes

Article Highlights:

  • Contractor Developer Credit
  • Retroactive Extension to 2022
  • Increased Credit 2023 through 2032
  • Prevailing Wage Requirements
  • Qualifications
  • Qualifying Residential Projects
  • Non-Refundable Credit
  • Basis Adjustment

As part of the Inflation Reduction Act, passed in August 2022, modifying Internal Revenue Code Sec. 45L, contractors will benefit from the increased tax credit for building Energy Efficient New Homes effective January 1, 2023. In addition, this credit that had previously expired after 2021, has been extended through 2032.

For 2022, the old credit rules have been retroactively extended providing a $2,000 tax credit for site built home and a $1,000 or $2,000 tax credit for manufactured homes that meet the energy saving requirements of 50% for a site built home and 30% to 50% for manufactured homes. 

Beginning in 2023 and before 2033 the amount of the credit is increased, and can be $500, $1,000, $2,500, or $5,000, depending on which energy efficiency requirements the home satisfies and whether the construction of the home meets the prevailing wage requirements.  

  • $2,500 Credit – for single family and manufactured homes when constructed per the standards set by the Energy Star Residential New Construction Program or the Manufactured Homes Program.
  • $5,000 Credit – for single family and manufactured homes when they are certified by the Department of Energy as a Zero Energy Ready Home.
  • $500 Credit – For multifamily homes when meeting the Energy Star Single Family New Homes Program.
  • $1,000 Credit – for multifamily homes when they are certified by the Department of Energy as a Zero Energy Ready Home.

Prevailing Wage Requirements – Under the prevailing wage requirements, for any qualified residence, the taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractors or subcontractor in the construction of the residence are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which the residence is located as determined by the Secretary of Labor.  

Failure to satisfy the prevailing wage requirements can be cured by paying to each affected worker an amount equal to the difference between the amount actually paid and the amount which would have been paid under the prevailing wages rules, plus interest, and paying a $5,000 penalty per affected worker.

Qualifications – To qualify for the credit:  

  • The home must be in the U.S.
  • The home must be sold, leased, or rented out.
  • The dwelling’s heating and cooling energy consumption should fall below certain national energy standards.
  • The dwelling unit must be certified to be at least 50% more energy efficient than a similar unit constructed per the 2006 International Energy Conservation Code, with at least 10% being derived from building envelope component improvements.

Qualifying Residential Projects – Various types of residential projects qualify for the tax credit, including:

  • Single-family homes (both track and custom builds)
  • Multi-family apartment and condominium projects (3-stories or less)
  • Assisted living facilities   
  • Student housing
  • Substantial reconstruction or rehabilitation

Non-Refundable Credit – The tax credit is non-refundable, meaning it can only offset current tax liability and any excess is not refundable. However, it may be carried forward for up to 20 years by the builder or developer and used to offset tax liability in those years. .

Basis Adjustment – The contractor must reduce the basis of the home for which the credit is claimed by the amount of the credit.

Of course there will be further guidance and clarifications forthcoming related to the changes affecting the 2023 through 2032 credit from the IRS. If you have questions please give this office a call.