Energy efficiency is best achieved through the use of voluntary, market-based programs. Efficiencies can be maximized by directing incentives at both existing and new homes, including options for existing home energy efficiency upgrades, supporting financing alternatives that reflect energy cost savings and developing alternative sources of energy. (4/05 Resolution #7)
Present Law
Section 45L provides a tax credit to an eligible contractor who constructs a qualified new energy-efficient home. To qualify the home must be: (1) a dwelling in the U.S.; (2) substantially completed after the date of enactment; and (3) certified by the Secretary to meet the standards for a 50-percent (30-percent in some cases for manufactured homes) reduction in energy usage, compared to a dwelling constructed in accordance with the standards of Chapter 4 of the 2003 International Energy Conservation Code and any applicable Federal minimum efficiency standards for the equipment.
The credit equals $2,000 for a qualified home. The eligible contractor is the taxpayer who constructs the home. For manufactured homes meeting the 30-percent standard, the credit equals $1,000. The credit is part of the general business credit (nonrefundable; 20-year carryforward); however, no credits attributable to section 45L can be carried back to any taxable year prior to the effective date of the credit. A basis adjustment must be made in the amount of the credit claimed. This will reduce the net value of the credit upon sale.
The credit applies to homes for which construction is substantially completed after August 8, 2005, and which are purchased after December 31, 2005, and prior to January 1, 2010.
Legislative History
Section 45L was established by H.R. 6, the Energy Policy Act of 2005. The sunset for Section 45L was extended one year by the Tax Relief and Health Care Act of 2006 and one year by the Emergency Economic Stablization Act of 2008. The credit sunsets on December 31, 2009.
Regulatory Background
IRS guidance for the Section 45L credit includes Notice 2006-27, which provides the technical rules by which a contractor must qualify for the credit, and Notice 2006-28, which provides guidance for manufactured homes. In particular, IRS Notice 2006-27 requires a credit qualified dwelling unit to be a single unit with eating and sleeping facilities, within a building that is not more than 3 stories above grade (Section 4(3)). However, Notice 2007-27 has been superseded by Notice 2008-35, which clarifies a number of issues in favor of builders and homebuyers.
Analysis
The original revenue estimate for the credit indicates a revenue loss of $28 million over ten years (with a sunset of 12/31/07). This estimate indicates the Congress designed the credit to be very difficult to use. In its present form, the credit can only be considered a demonstration project with limited use. The short effective period also makes the credit difficult to use, as builders often require years to plan and construct dwellings.
In response to NAHB submitted-comments regarding Notice 2006-27, the IRS has issued Notice 2008-35. NAHB's comments addressed two issues of concern to home builders. First, the Notice establishes a restrictive definition of rating network, effectively limited to the Residential Energy Services Network, that reduces competition for tax credit raters and increases administrative costs for builders. NAHB recommended that the IRS provide an explicit process by which other energy rating organizations may qualify as "equivalent rating networks," as referenced by but not defined in the Notice. In response, Notice 2008-35 allows certain state energy offices to act as equivalent energy networks.
Second, NAHB requested the IRS to clarify the qualifying definitions with respect to Section 45L. NAHB believes that a plain language reading of the tax code indicates that property used for rental purposes, retained for residential use by builders, and which does not transfer ownership from builder to homeowner qualify for the credit. Notice 2008-35 clarifies that homes sold for rental purposes qualify for the credit. However, homes retained for the builder's owner-occupied use do not qualify. The revised IRS guidance also indicates how the credit can be claimed when a 3rd party contractor is hired to perform construction for a homeowner.
For more information about this item, please contact Robert Dietz at 800-368-5242 x8285 or via e-mail at rdietz@nahb.org.
