Section 45L Tax Credit for Multifamily New Construction: Credit Amounts, Certification Paths, and Pro Forma Impact

Key Takeaways

What Is the Section 45L Credit

Section 45L of the Internal Revenue Code, formally titled the "New Energy Efficient Home Credit," provides a federal tax credit to eligible contractors who construct energy-efficient dwelling units in the United States. Originally enacted as part of the Energy Policy Act of 2005 and codified as IRC Section 45L, the credit has been extended, modified, and expanded several times. The most significant overhaul came with the Inflation Reduction Act (IRA) of 2022, which restructured credit amounts, introduced prevailing wage requirements, and expanded the credit through the end of 2032.

The OBBBA subsequently shortened that runway. The credit applies only to qualified new energy efficient homes acquired before July 1, 2026, and that deadline has now passed. Developers can still claim the credit for qualifying units that were acquired on or before June 30, 2026, but no new units can qualify.

Section 45L is claimed by the eligible contractor: the person that constructed the dwelling unit, owned and had a basis in it during construction, and then sold or leased it to a person who uses it as a residence (IRS Notice 2023-65, sections 5.01 and 5.02). Despite the word "contractor," in multifamily development this is normally the owner/developer entity that hires the general contractor, not the GC itself.

The credit is not a deduction. It reduces federal tax liability dollar-for-dollar. A $5,000 credit per unit on a 200-unit project is $1,000,000 off the tax bill, not $1,000,000 in reduced taxable income. The credit also reduces the depreciable basis of the units by the same $1,000,000 (IRC 45L(e)), which gives up $370,000 of future tax savings at a 37% rate (see Impact on project returns below). Even net of that, 45L is substantially more valuable per dollar than a depreciation deduction or expense offset.

Credit Amounts and the Prevailing Wage Multiplier

The IRA restructured 45L into a two-tier system based on certification level, with a 5x multiplier for projects that pay prevailing wages. The ENERGY STAR 45L guidance outlines the certification requirements for each tier.

Base credit amounts (without prevailing wages)

Table 1. Base 45L credit amounts for dwelling units in buildings eligible for the ENERGY STAR Multifamily New Construction program, without prevailing wage compliance.

Enhanced credit amounts (with prevailing wages)

Table 2. Enhanced 45L credit amounts when prevailing wage requirements are satisfied during construction. The 5x multiplier applies to both certification tiers.

The arithmetic is straightforward, but the implications are significant. The gap between the lowest credit ($500 per unit without prevailing wage, Energy Star only) and the highest ($5,000 per unit with prevailing wage and ZERH) is a factor of 10. On a 200-unit project, that is the difference between $100,000 and $1,000,000 in tax credits.

Which buildings get the multifamily amounts

Under the IRA version of 45L, the multifamily amounts ($500/$1,000 base, $2,500/$5,000 with prevailing wages) apply to any dwelling unit that is part of a building eligible to participate in the ENERGY STAR Multifamily New Construction program (IRC 45L(a)(2)(B) and (g)). Under the ENERGY STAR MFNC program rules, that covers all site-built or modular multifamily buildings that are not single-family detached homes, duplexes, or townhouses, with no height limit, and mixed-use buildings that are at least 50% residential. A six-story apartment building earns the same per-unit amounts as a three-story garden building. The old three-story limit came from IRS Notice 2008-35, which Notice 2023-65 made obsolete for homes acquired after December 31, 2022. See the DOE Section 45L guidance for the DOE side of the requirements.

Townhouses, detached duplexes, and detached single-family homes (including built-to-rent communities) fall under the ENERGY STAR Single-Family New Homes program instead. Under 45L(a)(2)(A) they earn $2,500 (ENERGY STAR) or $5,000 (ZERH) per unit. The prevailing wage rule in 45L(g) applies only to multifamily units, so these homes earn those amounts without paying prevailing wages. This article focuses on apartment buildings (garden-style, mid-rise, and high-rise), where the prevailing wage decision drives the credit amount.

Eligible Dwelling Units

Not every residential unit qualifies for the 45L credit. The statute defines specific requirements that each dwelling unit must meet.

What counts as an eligible dwelling unit

Under IRC Section 45L, a "qualified new energy efficient home" is a dwelling unit that meets all of the following conditions:

1. Located in the United States. The unit must be situated within the 50 states or the District of Columbia.
2. Substantially completed after August 8, 2005. This is the original enactment date. For current purposes, it is not a binding constraint on new construction.
3. Constructed by an eligible contractor. The eligible contractor is the person that constructed the unit and owned and had a basis in it during construction (Notice 2023-65, section 5.02; discussed in detail below).
4. Acquired by a person from the eligible contractor. The unit must be purchased or leased by someone who uses it as a residence. In multifamily rental housing, leasing the unit to a resident satisfies this requirement (Notice 2023-65, section 5.01).
5. Certified to meet applicable energy standards. The unit must be certified under either the ENERGY STAR or DOE Zero Energy Ready Home (now DOE Efficient New Homes) program requirements, depending on the credit tier being claimed. The certification must be issued before the unit is acquired. In multifamily buildings, certification is generally issued for the whole building rather than unit by unit (see How to Claim the Credit).

The "acquired" requirement in multifamily rental

The statute uses the word "acquired," which in single-family housing typically means a home sale. In multifamily rental development, the IRS treats a qualified home that is leased by a person from an eligible contractor for use as a residence during the taxable year as "acquired" (Notice 2023-65, section 5.01). When a newly constructed apartment is leased to a resident, that unit has been "acquired" for purposes of Section 45L. The credit becomes available in the taxable year in which the dwelling unit is leased to a tenant, not in the year the certificate of occupancy is issued or the year construction is completed.

This means that a 200-unit project that completed construction in March 2026 and leased up through May 2026 can claim credits for units as they were leased. Units certified and leased before July 1, 2026 qualify. Because multifamily certification generally covers the whole building, a unit leased before its building was certified is at risk even if the lease was signed before July 1, 2026. Units leased on or after July 1, 2026 do not, under the OBBBA sunset.

Common dwelling types that qualify

• Garden-style, mid-rise, and high-rise apartment units in buildings eligible for ENERGY STAR MFNC (multifamily amounts: $500 to $5,000 per unit)
• Units in triplexes and larger multifamily buildings (multifamily amounts)
• Condominium units in multifamily buildings (for-sale, claimed by the eligible contractor)
• Units within mixed-use buildings that are at least 50% residential (multifamily amounts)
• Townhouses and detached duplexes, for sale or for rent (single-family amounts: $2,500 or $5,000 per unit, no prevailing wage requirement)
• Single-family rental homes in built-to-rent communities (single-family amounts)

What does NOT qualify

• Hotel and motel rooms (transient lodging, not residential)
• Lightly renovated existing units. 45L covers new construction and also substantial reconstruction and rehabilitation (IRC 45L(b)(3)), but a renovation that is not a substantial reconstruction or rehabilitation, or that does not produce a unit certified under the applicable program, does not qualify
• Accessory dwelling units that do not have their own entrance, kitchen, and bathroom (they are not separate "dwelling units")
• Units the eligible contractor retains for its own use as a residence (Notice 2023-65, section 5.01)
• Units not sold or leased to a resident on or before June 30, 2026

Energy Star vs ZERH Certification

The two certification tiers represent substantially different levels of energy performance, construction cost, and verification rigor. Understanding the differences is essential for determining which tier to target. The choice is not simply "more certification for more credit." It is a cost-benefit analysis that depends on the project's location, construction method, energy market, and timeline.

Energy Star Multifamily New Construction (MFNC)

The ENERGY STAR Multifamily New Construction program certifies site-built or modular multifamily buildings of any height (other than single-family detached homes, duplexes, and townhouses) and mixed-use buildings that are at least 50% residential. All ENERGY STAR multifamily buildings must demonstrate energy savings of at least 10% over their state's energy code, using an Energy Rating Index (ERI) score, an ASHRAE 90.1 model, or EPA's prescriptive path.

Key ENERGY STAR MFNC requirements include:

• HVAC system efficiency: Equipment must meet minimum efficiency ratings (SEER2/HSPF2 for heat pumps, AFUE for furnaces) as specified in the ENERGY STAR program requirements document for the applicable revision.
• Building envelope: Insulation levels, air sealing, and window performance must meet or exceed the prescriptive thresholds. The program uses a checklist-based approach with mandatory items and performance targets.
• Lighting and appliances: ENERGY STAR-certified lighting and appliances are required in certain applications.
• Duct leakage: Total duct leakage must be tested and must fall below specified thresholds per unit.
• Third-party verification: An ENERGY STAR-certified HERS rater or equivalent multifamily rater must verify compliance through inspection and testing.

For most multifamily builders already targeting modern energy codes (2021 IECC or later), ENERGY STAR certification represents a modest incremental cost. The program is well-established, rater networks are extensive, and the prescriptive path provides a clear roadmap for compliance. This article uses an illustrative assumption of $1,000 to $4,000 per unit of incremental cost above code-minimum construction for ENERGY STAR (see Table 8), varying with the local energy code baseline, climate zone, and construction type. Replace it with project-specific pricing.

DOE Zero Energy Ready Home (ZERH)

The DOE Zero Energy Ready Home program, now known as DOE Efficient New Homes (DOE's successor program, which DOE describes as substantively the same), is substantially more rigorous than ENERGY STAR. A certified home is so energy efficient that a renewable energy system could offset most or all of its annual energy use. The home does not need to have solar panels installed. This article keeps the ZERH label because 45L(c)(1)(B) refers to the zero energy ready home program (or any successor program).

Under the DOE Efficient New Homes Multifamily Version 2 program requirements, the program builds on the ENERGY STAR platform and adds several additional requirements:

• ENERGY STAR certification within the program: The Multifamily Version 2 (Rev. 2) requirements make ENERGY STAR MFNC and EPA Indoor airPLUS certification a condition of building eligibility. For 45L purposes, however, DOE certification is what qualifies a unit for the $1,000/$5,000 tier; the statute does not separately require ENERGY STAR certification for that tier (DOE 45L FAQ).
• EPA Indoor airPLUS certification: Indoor air quality measures including mechanical ventilation, moisture control, radon-resistant construction (in applicable zones), and low-emission materials.
• Enhanced insulation and air sealing: Insulation levels must meet specified 2021 or 2024 IECC efficiency levels (or the program's target design levels on the prescriptive path). Air leakage must be tested at or below specified thresholds.
• High-efficiency water heating: Water heating systems must meet specified efficiency criteria, typically requiring heat pump water heaters or high-efficiency tankless units.
• Advanced lighting package: More comprehensive ENERGY STAR lighting requirements than the base ENERGY STAR program.
• "Solar-ready" construction: Electrical panel capacity, conduit routing, and roof structural capability to support a future solar installation, even if panels are not installed at construction.
• ERI (HERS) target: On the ERI path, each rated unit must meet the program's ERI target, calculated under the DOE Efficient New Homes Multifamily ERI Target Procedure.

ZERH certification costs more. This article uses an illustrative assumption of $4,000 to $12,000 per unit of incremental cost above code-minimum construction (see Table 8), depending on climate zone, mechanical system choices, and the gap between the local energy code baseline and ZERH requirements. In states with aggressive energy codes (California Title 24, Washington State Energy Code), the incremental cost is on the lower end because the code baseline is already close to ZERH performance. In states with older or less stringent codes, the gap is wider and costs are higher.

Certification requirements comparison

Table 3. Side-by-side comparison of Energy Star MFNC and DOE ZERH certification requirements. ZERH builds on Energy Star and adds indoor air quality, solar readiness, and more stringent performance targets. Incremental cost figures are illustrative assumptions, not survey data.

Which tier to target

The decision between Energy Star and ZERH is ultimately a cost-benefit calculation that depends on three variables: incremental construction cost, per-unit credit amount, and prevailing wage status.

Without prevailing wages: The incremental credit for ZERH over Energy Star is $500 per unit ($1,000 vs $500). If ZERH adds $4,000 to $12,000 in construction cost per unit, the credit alone does not cover the incremental cost. The case for ZERH without prevailing wages rests on other benefits: marketing value, lower operating costs for tenants, state and local incentives, and compliance with increasingly stringent energy codes that are moving toward ZERH-equivalent performance.

With prevailing wages: The incremental credit for ZERH is $2,500 per unit ($5,000 vs $2,500). Against incremental construction costs of $4,000 to $12,000, this materially improves the economics. Where ZERH's incremental hard cost above code is $5,000 to $7,000 per unit, the $5,000 ZERH credit covers roughly 70% to 100% of it before certification fees, or roughly 59% to 77% once a $1,500 per unit certification fee is added ($5,000 / $8,500 and $5,000 / $6,500). Comparing like with like, at the Climate Zone 4-5 midpoints in Table 8, ZERH costs about $5,000 per unit more than Energy Star ($7,500 vs $2,500 before certification fees), or $5,500 more with the $1,500 and $1,000 certification fees used in the break-even analysis below, so the $2,500 credit increment covers about 45% to 50% of that step-up. These ratios count the credit at face value; the 45L(e) basis reduction lowers its net value (see Impact on project returns). Combined with operating cost savings and utility incentives, ZERH can be a strong financial case in projects that already pay prevailing wages.

Prevailing Wage Requirements

The prevailing wage requirement was introduced by the IRA as part of a broader pattern across clean energy tax incentives. It is the single largest lever on 45L credit economics, converting a $500 credit to $2,500 and a $1,000 credit to $5,000. Understanding the requirements precisely is essential because a prevailing wage failure reduces the credit by 80%.

What "prevailing wages" means in practice

The prevailing wage requirement for Section 45L aligns with the Davis-Bacon Act framework. Construction laborers and mechanics employed on the project must be paid wages at rates not less than the prevailing rates determined by the Secretary of Labor for the geographic area in which the project is located. These rates are published by the Department of Labor's Wage and Hour Division and vary by trade classification and county.

The requirement applies to:

• All construction laborers and mechanics. This includes general laborers, carpenters, electricians, plumbers, HVAC technicians, painters, roofers, ironworkers, and other construction trade workers.
• The entire construction of the residence. Prevailing wages must be paid to laborers and mechanics employed in the construction of each qualifying residence. Underpayments must be corrected under the correction-and-penalty rules described below, or the enhanced credit is lost.
• All tiers of subcontractors. The statute requires the taxpayer claiming the credit to ensure that laborers and mechanics employed by the taxpayer or any contractor or subcontractor are paid prevailing wages (IRC 45L(g)(2)(A)). In practice the owner flows this obligation down through the GC contract to all subs and sub-subs.

Determining applicable wage rates

Prevailing wage rates are county-specific and trade-specific. A project in Cook County, Illinois will have different prevailing wage rates than a project in Maricopa County, Arizona. The developer or general contractor must obtain the applicable wage determination from the DOL Wage and Hour Division before construction begins and ensure that all payroll reflects those rates.

In areas with strong union presence, prevailing wage rates may be identical to or close to union scale. In these markets, the prevailing wage requirement adds minimal incremental cost. In right-to-work states or areas with lower union density, prevailing wages may exceed the market rate for non-union labor. This article uses an illustrative premium of 5% to 15% on labor costs; the actual premium depends on the trade and geography.

The 5x multiplier economics

The prevailing wage multiplier creates a clear break-even calculation. On an Energy Star project claiming $2,500 per unit (versus $500 without prevailing wages), the incremental credit is $2,000 per unit. If the project has 200 units, the incremental credit is $400,000. As long as the incremental cost of prevailing wages across the entire project is less than $400,000, the prevailing wage path generates a net benefit.

For ZERH projects, the math is even more favorable. The incremental credit from prevailing wages is $4,000 per unit ($5,000 vs $1,000). On 200 units, that is $800,000 in incremental credit. Prevailing wages would need to add more than $4,000 per unit to total construction cost before the enhanced credit stops paying for itself. As an illustration, assume labor is 40% of the worked example's $220,000 per-unit hard cost, or $88,000 per unit, and a prevailing wage premium of 5% to 15% on that labor (both illustrative assumptions). The premium is then $4,400 to $13,200 per unit ($880,000 to $2,640,000 across 200 units), above the $4,000 ZERH break-even and well above the $2,000 Energy Star break-even. On these assumptions, the enhanced credit pays for itself only where the premium is small: below about 4.5% of labor cost for ZERH ($4,000 / $88,000) and about 2.3% for Energy Star ($2,000 / $88,000). That describes markets where prevailing rates are close to what the project already pays, and projects that must pay prevailing wages anyway. These break-evens hold in nominal terms even after the 45L(e) basis reduction. The credit reduces depreciable basis by the credit amount, but the premium is capitalized labor that adds to depreciable basis, so at the same tax rate and recovery period the two depreciation effects offset: at a 37% rate, each dollar of credit and each dollar of premium both net to about $0.63. The break-evens therefore stay at about $4,000 per unit for ZERH and $2,000 per unit for Energy Star, or about 4.5% and 2.3% of the illustrative $88,000 labor cost.

Correction and penalty provisions

The IRA includes a cure provision for prevailing wage failures. Section 45L(g)(2)(B) applies rules similar to IRC 45(b)(7)(B): a taxpayer that underpaid workers is deemed to have satisfied the requirement if it pays each affected worker the shortfall plus interest at the section 6621 underpayment rate with 6 percentage points substituted for 3, and pays the IRS a penalty of $5,000 per affected worker. If the failure is due to intentional disregard, the worker payment is tripled and the penalty rises to $10,000 per worker. After a final IRS determination of a failure, the payments must be made within 180 days. The details of the cure provision are significant for developers managing large subcontractor networks where compliance monitoring across dozens of trades and multiple tiers is operationally complex.

Developer vs Builder Eligibility

In single-family homebuilding, the "eligible contractor" question is usually simple: the homebuilder owns the lot, builds the home, and sells it to a buyer. The builder claims the credit. In multifamily development, the owner entity usually hires a separate general contractor, which raises the question of which party claims the credit. The IRS has answered that question directly.

Who is the "eligible contractor"?

IRC Section 45L(b)(1) defines the eligible contractor as the person who constructed the qualified new energy efficient home (or, in the case of a manufactured home, the person who produced it). Notice 2023-65, section 5.02, adds an ownership test: the eligible contractor is the person that constructed the home and owned and had a basis in the home during its construction. The notice then gives the multifamily answer: "if a person that owns and has a basis in a qualified home during its construction hires a third-party contractor to construct the home, the person that hires the third-party contractor is the eligible contractor and the third-party contractor is not an eligible contractor." The Form 8908 instructions repeat this definition, and Item B on the form asks the claimant to confirm that it had a basis in each home during its construction.

Applied to the three parties in a typical multifamily development:

1. The developer/owner entity: The LLC or LP that owns the land and the buildings and capitalizes the construction costs. It owns and has basis in the units during construction, so it is normally the eligible contractor, whether it self-performs construction or hires a GC.
2. The general contractor: A separate entity paid a contract price to build on land it does not own. It has no basis in the units and is not the eligible contractor, whatever the contract form (lump sum, GMP, design-build, or construction management at-risk).
3. The development manager or fee developer: An entity that oversees construction for a fee on behalf of the owner. It does not own or have basis in the units, so it is not the eligible contractor either.

IRS guidance on multifamily

Because the test turns on ownership and basis, factors such as who holds the building permit, who directs the subcontractors, or who bears cost-overrun risk under the construction contract do not decide the question. What matters is which entity owned the units and carried the construction costs during construction, and which entity then sold or leased them to residents. The statute also requires each unit to be acquired from the eligible contractor, so structures in which one entity builds and a different entity leases the units need tax counsel review. The credit is claimed by the eligible contractor; a party that does not meet the definition cannot claim it, and an improper claim creates audit risk.

Practical implications

Confirm early which entity will own and carry basis in the units during construction and will lease them, and make sure that entity claims the credit on Form 8908 (or, for a partnership, reports it to partners). A construction contract cannot shift the credit to a GC that has no basis in the units, and no credit-sharing arrangement with the GC is needed for the owner to claim it.

Tax counsel should review the structure before construction begins. A later determination that the wrong entity claimed the credit means the credit may be disallowed on audit, with interest and potential penalties.

Worked Example: 200-Unit Garden-Style Project

To illustrate how 45L flows through a real development, consider a 200-unit garden-style apartment community in a prevailing-wage project. The buildings are three stories above grade, and the developer is pursuing DOE Zero Energy Ready Home certification. The project is a LIHTC deal that also has 12 or more HOME-assisted units. The owner partnership owns the land and buildings and hires a third-party GC, so the owner partnership is the eligible contractor. All figures are illustrative assumptions.

Project assumptions

Table 4. Assumptions for the 200-unit worked example. The project's HOME funding already requires Davis-Bacon wages under 24 CFR 92.354, so the prevailing wage requirement for 45L imposes no incremental labor cost. LIHTC credits and tax-exempt bond financing would not by themselves have triggered Davis-Bacon.

Credit calculation

Table 5. Credit calculation for the 200-unit ZERH project with prevailing wages.

Net benefit analysis

Table 6. Net benefit analysis. The 45L credit does not fully cover the incremental cost of ZERH certification in this example. At face value it reduces the net cost from $1,900,000 to $900,000. Because the credit also reduces the depreciable basis of the units by $1,000,000 (IRC 45L(e)), though not the LIHTC eligible basis, the owner gives up $1,000,000 of depreciation, worth $370,000 at a 37% rate, which takes the net cost to $1,270,000 in nominal terms ($1,900,000 − $1,000,000 + $370,000). That $370,000 is received over the recovery period, so its present value is lower and the economic net cost falls between $900,000 and $1,270,000. Costs are shown before tax and exclude the depreciation the incremental costs themselves generate. Additional benefits (lower operating costs, utility incentives, marketing value) are not captured in this table.

Comparison: what if only Energy Star?

If the same project pursued only Energy Star certification (not ZERH), the math changes:

Table 7. Scenario comparison, with certification fees included in both rows ($2,500 hard cost plus $1,000 certification for Energy Star; $8,000 plus $1,500 for ZERH). Both rows assume, as in the worked example, that Davis-Bacon wages are already required, so no prevailing wage premium is charged to 45L. The last column adds the tax savings given up through the 45L(e) basis reduction at a 37% rate, in nominal terms: $185,000 on the $500,000 Energy Star credit and $370,000 on the $1,000,000 ZERH credit. Costs are shown before tax and exclude the depreciation the incremental costs themselves generate. Energy Star with prevailing wages recovers about 71% of its incremental cost at face value on these assumptions. ZERH has a higher total credit but also a higher net cost. The optimal choice depends on the developer's valuation of operating cost savings, marketing differentiation, and compliance with future code trajectories.

Impact on project returns

On a $62,000,000 total development cost project, a $1,000,000 45L credit represents 1.6% of TDC. That may sound modest, but the credit is a dollar-for-dollar reduction of federal income tax, not a deduction. For a taxpayer in the 37% federal bracket, a $1,000,000 deduction saves $370,000, while a $1,000,000 credit that the taxpayer can fully use saves $1,000,000 in the year it is claimed. Before any adjustment, that makes the credit about 2.7x as valuable as a deduction of the same nominal amount ($1,000,000 / $370,000).

The 45L(e) basis reduction narrows that gap. Because the credit reduces depreciable basis by $1,000,000, the taxpayer gives up $1,000,000 of future depreciation deductions, worth $370,000 at 37% and received over the recovery period (or, if the property is sold before that basis would have been fully depreciated, the remainder shows up as a larger taxable gain on sale). Net of that, the credit is worth about $630,000 in nominal terms ($1,000,000 − $370,000), or about 1.7x the value of a $1,000,000 deduction ($630,000 / $370,000). Because the lost deductions arrive later, the present value of what is given up is less than $370,000, so the credit's economic value falls between $630,000 and $1,000,000.

In this LIHTC structure the owner partnership is the eligible contractor, and the credit is allocated to the partners in line with their interests in the partnership, generally following how the related depreciation deductions are allocated (see Partnership and S corporation considerations below). Its value to each partner depends on that partner's ability to use general business credits under the section 38 limitation. It is a reduction in tax, not a cash distribution, so model it in each partner's after-tax return rather than as project cash flow.

Cost-Benefit Analysis

The cost-benefit analysis for 45L depends on four variables: the certification tier, the prevailing wage status, the incremental construction cost, and the local energy code baseline. No single answer applies to all projects.

Incremental construction cost ranges

The incremental cost of achieving Energy Star or ZERH certification over code-minimum construction varies widely by climate zone, local energy code, and construction type. The following ranges are illustrative assumptions for modeling, not survey results. Replace them with pricing from your rater, energy consultant, and GC.

Table 8. Illustrative incremental construction cost per dwelling unit by climate zone and certification level. Costs are above the applicable local energy code minimum and exclude certification fees.

Break-even analysis by scenario

The following analysis compares the 45L credit to the incremental cost of certification for a 200-unit garden-style project in a Climate Zone 4 location. Hard costs are the midpoints of the Climate Zone 4-5 ranges in Table 8: $2,500 per unit for Energy Star and $7,500 per unit for ZERH (the worked example above assumed $8,000 for ZERH). Certification fees are assumed at $1,000 per unit for Energy Star and $1,500 per unit for ZERH. Scenarios B and D are shown two ways. The first assumes the project already pays Davis-Bacon wages for other reasons (as in the HOME-funded worked example), so no prevailing wage premium is charged to 45L. The second assumes the project would not otherwise pay prevailing wages and adds the illustrative premium from the prevailing wage section: $4,400 to $13,200 per unit (5% to 15% of $88,000 of labor per unit), or $880,000 to $2,640,000 across 200 units. All credits are counted at face value; Table 9 below adds the 45L(e) basis reduction.

Scenario A: Energy Star, no prevailing wage. Total credit: 200 × $500 = $100,000. Total incremental cost: 200 × ($2,500 + $1,000) = $700,000. Net cost: $600,000. The 45L credit covers only 14% of the incremental cost. The credit alone does not justify pursuing Energy Star solely for 45L purposes, though Energy Star may be required by state programs, investor mandates, or local green building ordinances.

Scenario B: Energy Star, with prevailing wage. Total credit: 200 × $2,500 = $500,000. Total incremental cost: 200 × ($2,500 + $1,000) = $700,000. If prevailing wages are already required, net cost is $200,000: the credit covers 71% of the incremental cost, and the remaining $200,000 may be offset by operating cost savings over the hold period. If the project pays prevailing wages only to earn the enhanced credit, total incremental cost is $700,000 + $880,000 to $2,640,000 = $1,580,000 to $3,340,000, and net cost is $1,080,000 to $2,840,000. The credit then covers only about 15% to 32% of the cost, and Scenario B costs $480,000 to $2,240,000 more, net, than Scenario A's $600,000.

Scenario C: ZERH, no prevailing wage. Total credit: 200 × $1,000 = $200,000. Total incremental cost: 200 × ($7,500 + $1,500) = $1,800,000. Net cost: $1,600,000. The credit covers 11% of the incremental cost. ZERH without prevailing wages is rarely justified by the 45L credit alone.

Scenario D: ZERH, with prevailing wage. Total credit: 200 × $5,000 = $1,000,000. Total incremental cost: 200 × ($7,500 + $1,500) = $1,800,000. If prevailing wages are already required, net cost is $800,000 and the credit covers 56% of the incremental cost. This is the strongest financial case for ZERH, and it depends on prevailing wages already being required. If the project pays prevailing wages only to earn the enhanced credit, total incremental cost is $1,800,000 + $880,000 to $2,640,000 = $2,680,000 to $4,440,000, net cost is $1,680,000 to $3,440,000, and the credit covers only about 23% to 37% of the cost. On those assumptions Scenario D costs $80,000 to $1,840,000 more, net, than Scenario C's $1,600,000.

Table 9. Break-even scenarios for a 200-unit Climate Zone 4 project, using Table 8 midpoints, the certification fees above, and the illustrative prevailing wage premium of $880,000 to $2,640,000. The basis reduction effect is 37% of the credit: under IRC 45L(e) the credit reduces depreciable basis by the same amount, and the depreciation given up is received over the recovery period, so its present value is lower than the nominal figure shown. Costs are before tax and exclude the depreciation the incremental costs themselves generate. All figures are illustrative.

Read across the rows, the enhanced credit improves the economics only where prevailing wages are already required. Where the project would pay the premium only to earn the 5x credit, the illustrative premium exceeds the extra credit in both tiers, consistent with the break-even analysis in the prevailing wage section.

Factors beyond the credit amount

The 45L credit is one component of the financial case for energy-efficient construction. Other factors that enter the analysis include:

• Operating cost savings: ENERGY STAR multifamily buildings must demonstrate at least 10% energy savings over the state energy code, and DOE ZERH homes are designed so that a renewable system could offset most or all of their annual energy use. In owner-paid utility models, this reduces operating expenses directly. In tenant-paid utility models, lower utility costs support higher effective rents or faster lease-up.
• State and local incentives: Many states and utilities offer additional incentives for energy-efficient construction. These can include design assistance, prescriptive rebates for high-efficiency equipment, and performance-based incentives. These incentives are additive to the 45L credit.
• Competitive allocation scoring: In LIHTC projects, energy efficiency measures frequently earn points under the state QAP. Projects pursuing 9% credits may achieve Energy Star or ZERH certification partly to improve their competitive allocation score, with the 45L credit as an additional benefit.
• Future code compliance: Energy codes are tightening toward ZERH-equivalent performance levels. Building to ZERH standards today may avoid costly retrofits when future codes take effect during the property's hold period.
• Green certifications and ESG: Institutional investors increasingly require or prefer green certifications for portfolio properties. ZERH certification can improve access to capital and investor interest, particularly among ESG-mandated investment vehicles.

45L and Cost Segregation

Section 45L and cost segregation studies can be used together, but they are not independent. They operate through different mechanisms and reduce tax through different line items on the return, and the 45L credit also reduces the basis that cost segregation works from.

How they work together

45L provides a dollar-for-dollar tax credit based on energy certification and number of units. The credit reduces tax liability directly. It also reduces the depreciable basis of the units by the amount of the credit (IRC 45L(e); Form 8908 instructions). For LIHTC projects, that reduction does not apply when computing the building's adjusted basis under section 42, so it does not reduce eligible basis.

Cost segregation accelerates depreciation deductions by reclassifying building components from 27.5-year residential real property to shorter-lived asset classes (5, 7, or 15 years), which can qualify for bonus depreciation. Under the One Big Beautiful Bill Act (Pub. L. 119-21, section 70301), bonus depreciation is 100% for qualified property acquired after January 19, 2025 (IRS Publication 946), and property is not treated as acquired after the date a written binding contract for its acquisition is entered into (IRC 168 and its effective-date notes). Construction contracts are treated differently. Under the IRS interim guidance in Notice 2026-11 (sections 2.03 and 3.03, applying rules consistent with Treas. Reg. 1.168(k)-2(b)(5)), property built for the taxpayer by another person under a written binding contract entered into before construction begins is treated as self-constructed, and self-constructed property counts as acquired after January 19, 2025 if construction begins after that date. Construction begins when physical work of a significant nature begins, with a safe harbor keyed to incurring or paying more than 10% of the property's total cost. On a ground-up project with a GC contract signed before construction, the deciding question is therefore usually when construction of the components began, not when the contract was signed. Property acquired before January 20, 2025 (including under a written binding contract to buy it, or, for property constructed for the taxpayer, where construction began before that date) stays on the prior phase-down: 40% if placed in service in 2025 and 20% if placed in service in 2026 (Pub. L. 115-97, section 13201). The deductions reduce taxable income, not tax liability directly.

Both can be claimed, and claiming one does not preclude the other. The interaction runs through basis: 45L reduces the depreciable basis that depreciation and any cost segregation start from, so model the basis reduction ($1,000,000 in the worked example). The depreciation benefit is also a timing benefit: faster deductions now mean smaller deductions later, and depreciation is subject to recapture when the property is sold.

Sequencing and timing

Both the 45L credit and cost segregation benefits are claimed in the tax year the property is placed in service (or, for 45L, in the year units are acquired/leased). For a new multifamily project, the optimal sequence is:

1. During construction: Engage an energy consultant and HERS rater for 45L certification. Commission a cost segregation study from an engineering-based provider.
2. Before lease-up: Complete energy certification testing and documentation, and obtain each unit's certification before that unit is leased. Multifamily certification is generally issued for the whole building, so schedule the building's final certification (or, where the program allows it, a conditional unit certification) ahead of the first lease. Finalize the cost segregation study with as-built data, reflecting the 45L basis reduction.
3. On the tax return: Claim the 45L credit on Form 8908, with Form 7220 if claiming the prevailing wage amounts. Report accelerated depreciation from the cost segregation study on the depreciation schedule.

Combined impact example

Continuing the 200-unit ZERH example from above. The example does not break out land, so assume (as an illustrative assumption) a depreciable basis of $55,000,000 before the 45L adjustment, and a cost segregation study that reclassifies 15% to 25% of depreciable basis (also illustrative):

• 45L credit: $1,000,000 (200 units × $5,000 per unit)
• 45L basis reduction: depreciable basis falls from $55,000,000 to $54,000,000. LIHTC eligible basis is not reduced.
• Cost segregation: 15% to 25% of $54,000,000 is $8,100,000 to $13,500,000 of shorter-lived property. If those components count as acquired after January 19, 2025 (for GC-built components, generally because construction of them began after that date), 100% bonus depreciation gives $8,100,000 to $13,500,000 of first-year deductions, worth $2,997,000 to $4,995,000 to a partner in the 37% federal bracket. If they count as acquired before January 20, 2025 (for example, because construction began before that date) and were placed in service in 2026, 20% bonus gives $1,620,000 to $2,700,000 of bonus deductions (plus regular MACRS on the rest), worth $599,400 to $999,000 at 37%.
• Depreciation given up through the basis reduction: $1,000,000 in total over the recovery period, worth $370,000 at 37% (nominal). The cost segregation figures above are already computed on the reduced $54,000,000 basis, so they include the part of that loss that falls in the first year.
• Combined first-year federal tax effect (100% bonus case): $1,000,000 credit plus $2,997,000 to $4,995,000 of tax deferral from depreciation, with the remaining depreciation given up through the basis reduction falling in later years.

Keep the two numbers separate in the pro forma. The $1,000,000 credit is a permanent reduction in tax for partners that can use it, partly offset by the depreciation given up on the $1,000,000 basis reduction ($370,000 at 37% in nominal terms, received over the recovery period), for a net value of about $630,000 before discounting. The depreciation benefit is deferral: it lowers deductions in later years and is subject to recapture on sale. Adding them together and calling the total a return on equity overstates the value of the deferral. Experienced developers still plan both strategies from the start of the development process, because the certification work and the cost segregation study both depend on construction-period data.

The June 30, 2026 Sunset

The One Big Beautiful Bill Act (OBBBA), signed in 2025, set June 30, 2026 as the termination date for the Section 45L credit. The credit does not apply to qualified new energy efficient homes acquired after June 30, 2026. This is a hard date, not a phase-down or a gradual reduction.

What "acquired after June 30, 2026" means

For multifamily rental properties, "acquired" means leased. A dwelling unit is treated as acquired when it is leased to a person for use as a residence (Notice 2023-65, section 5.01). Where lease execution and move-in straddled June 30, 2026, document the lease commencement and residential use conservatively. Units that were physically completed but not yet leased as of June 30, 2026 do not qualify. This created operational urgency for projects that were nearing completion in the first half of 2026: the lease-up schedule, not just the construction schedule, determined whether the credit was available.

Consider a 200-unit project where construction completed in April 2026 and lease-up proceeded at a pace of 25 units per month. By June 30, 2026, approximately 75 units were leased. The remaining 125 units were leased between July and November 2026. Under the sunset provision, only the 75 units leased before July 1, 2026 qualify for the 45L credit. The total credit drops from $1,000,000 (at $5,000 per unit for all 200) to $375,000 (75 units at $5,000 per unit). That assumes each of the 75 units was certified before it was leased. Because multifamily certification is generally issued for the whole building, units leased in April or May, before a building's final certification, may not meet that test unless a conditional unit certification was issued first.

Was an extension enacted?

Section 45L has been extended multiple times since its original enactment in 2005. According to the amendment history of section 45L, the credit was extended in 2006, 2008, 2010, 2013, 2014, 2015, 2018 (retroactive to 2017), 2019, and 2020, several of those times retroactively, before the IRA restructured and extended it in 2022. No extension was enacted before the June 30, 2026 cutoff. As of this update, the statute still terminates the credit for homes acquired after June 30, 2026, and the most recent amendment to section 45L is the OBBBA's (Pub. L. 119-21, section 70508).

Developers who underwrote the credit as optional upside, not required equity, took the prudent approach. Pro formas for projects leasing up after June 30, 2026 should not include 45L. If a retroactive reinstatement is ever enacted, it will improve returns, but no current pro forma should depend on it.

Timeline implications for active projects

The June 30, 2026 deadline has passed. No new project can qualify for 45L. Only dwelling units acquired (leased) on or before June 30, 2026 could claim the credit. How the deadline played out depended on where a project stood:

• Projects that completed construction in Q1-Q2 2026: The critical variable was lease-up pace, not construction timeline. Every unit certified and leased on or before June 30, 2026 captured the credit; every unit leased after that date did not.
• Projects that started construction in Q3-Q4 2025: On a 12-month construction schedule, first units were not delivered until Q3 2026 or later, after the June 30, 2026 cutoff. Unless a phase was delivered, certified, and leased by June 30, 2026, these projects get no 45L credit.
• Projects that started construction in 2026 or later: On a 12-month schedule, these projects could not deliver, certify, and lease units on or before June 30, 2026, and 45L should not be included in the pro forma.

How to Claim the Credit

Claiming the 45L credit requires specific documentation and filing procedures. The process involves coordination between the developer, the energy rater, the tax preparer, and (in the case of partnerships and S corporations) the entity's K-1 reporting.

Required documentation

1. Energy certification. A certifier recognized under the ENERGY STAR or DOE program rules (an independent rater or verifier) must certify that each dwelling unit meets the applicable Energy Star or ZERH requirements. The certification must be issued before the unit is acquired (sold or leased) and before the credit is claimed (Form 8908 instructions, "Certification" and Item C). Units leased by June 30, 2026 but certified afterward do not qualify. In multifamily buildings this is a building-level question. Under the DOE Efficient New Homes Multifamily Version 2 (Rev. 2) National Program Requirements, dwelling units may only be certified if the entire building (all dwelling units and covered common spaces) is certified, and buildings are generally submitted for certification after verification of all units and common spaces is complete. On ERI path projects, the certification provider may at its discretion conditionally certify individual units before the building is complete, but those units must be decertified if the building ultimately cannot be certified (endnote 15). The ENERGY STAR MFNC program likewise certifies buildings. Units leased in a partly completed building before its final certification are therefore at risk; confirm the certification sequence with the rater, and confirm with tax counsel how a conditional certification is treated for the Form 8908 test.
2. Prevailing wage records. If claiming the enhanced credit, the developer must maintain certified payroll records demonstrating that prevailing wages were paid to all laborers and mechanics throughout the construction period. These records must be available for IRS review.
3. Form 8908. The eligible contractor claims the credit on IRS Form 8908, "Energy Efficient Home Credit." The form reports the number of qualifying dwelling units, the certification level, and the resulting credit amount.
4. Certifier's certification. The ENERGY STAR or DOE certification is issued by the certifier under the program rules, not by the builder (Notice 2023-65, section 6.04). The eligible contractor does not file it with the return but must keep it, including its date, in its records (Notice 2023-65, sections 6.01 and 7.02). Form 8908 Part II lists each certifier and the number of homes it certified.
5. Form 7220. Claiming the $2,500 or $5,000 prevailing wage amounts for multifamily units requires attaching Form 7220, Prevailing Wage and Apprenticeship (PWA) Verification and Corrections, to the return.

Partnership and S corporation considerations

When the eligible contractor is a partnership or S corporation (common in multifamily development), the credit flows through to the partners or shareholders on Schedule K-1. Credits are not separately allocable at will. Under Treas. Reg. 1.704-1(b)(4)(ii), a credit allocation cannot have economic effect, so the credit must be allocated in accordance with the partners' interests in the partnership when the credit arises. Where the expenditure that gives rise to the credit also gives rise to deductions (here, depreciation on the units), the credit follows the partners' shares of those deductions. Investors and limited partners should confirm before closing that the agreement's allocations satisfy this rule.

Timing of the credit

The credit is claimed in the taxable year in which the dwelling unit is acquired (leased) by a person who uses it as a residence. For a calendar-year taxpayer, units leased in January through June 2026 are claimed on the 2026 tax return. The credit cannot be claimed in advance of lease-up. It is part of the general business credit, so if it exceeds the taxpayer's general business credit limitation for the year, the unused amount can be carried back one year and forward 20 years (IRC 39(a)(1)).

Common Mistakes

These are the errors that most frequently result in lost credits, reduced credit amounts, or audit risk. Each is preventable with proper planning and coordination.

• Letting a party that never had basis in the units claim the credit. The eligible contractor is the entity that owned and had basis in the units during construction (Notice 2023-65, section 5.02), normally the owner entity. A third-party GC or fee developer is not the eligible contractor, and a construction contract cannot make it one. Resolve which entity owns the units during construction and leases them before construction begins.
• Missing the prevailing wage documentation. The 5x multiplier requires contemporaneous payroll records for all laborers and mechanics, across all subcontractor tiers. Developers who decide to claim the enhanced credit after construction is complete may find that payroll records are incomplete or unavailable. Start prevailing wage compliance monitoring at the beginning of construction.
• Pursuing ZERH certification without understanding the incremental cost. On this article's illustrative assumptions, ZERH costs $4,000 to $12,000 per unit more than code minimum. The $5,000 credit (with prevailing wages) does not always cover the incremental cost. Run the cost-benefit analysis before committing to ZERH, and make sure the decision accounts for factors beyond the 45L credit itself.
• Using the wrong credit table for townhouses and duplexes. Units in multifamily buildings of any height that are eligible for ENERGY STAR MFNC use the $500/$1,000/$2,500/$5,000 amounts. Townhouses, detached duplexes, and detached built-to-rent homes fall under the single-family program and earn $2,500 or $5,000 per unit without prevailing wages. Modeling them at the $500 multifamily amount understates the credit fivefold.
• Treating the 45L credit as a deduction. The credit reduces tax liability dollar-for-dollar. Modeling it as a deduction understates its value. At a 37% marginal rate, a $1,000,000 deduction saves $370,000, while a $1,000,000 credit saves $1,000,000 before the basis adjustment. The credit also reduces depreciable basis by $1,000,000 (IRC 45L(e)), which gives up $370,000 of future depreciation savings at 37%, so its net value is about $630,000 in nominal terms. Ensure the pro forma models both the credit and the basis reduction.
• Ignoring the lease-up timing relative to the June 30, 2026 deadline. The credit attaches when a unit is leased, not when construction is complete. Projects that finished construction in Q2 2026 but leased up over the following six months lost the credit on units leased after June 30. Model the credit unit-by-unit based on the actual lease-up schedule.
• Not engaging the HERS rater early enough. Energy testing and certification require inspections at specific construction milestones (pre-drywall, duct pressurization, blower door). If the rater is not engaged until after drywall is installed, certain tests cannot be performed and the certification may be impossible to complete. Engage the rater at the start of construction and schedule inspections in the construction timeline. Each unit's certification must also be issued before that unit is leased, and because multifamily certification is generally issued for the whole building, plan for the building's certification to be complete before lease-up begins.
• Failing to coordinate 45L with cost segregation. The two strategies should be planned together, and the cost segregation study should reflect the 45L reduction in depreciable basis. The cost segregation study requires detailed construction cost data. The 45L certification requires energy testing data. Both processes are most efficient when they are initiated during construction, not after the fact.

Related Articles

This article is part of the tax credits series within deal structures. Each article examines a specific federal tax credit program and its application to commercial real estate development:

• Historic Tax Credits and Qualified Rehab Expenditures. Federal and state HTC mechanics, the 20% credit calculation, qualified rehabilitation expenditure rules, and how to structure HTC deals with LIHTC.
• New Markets Tax Credits and NMTC Leveraged Structure. How the NMTC leveraged lending structure works, qualified equity investments, CDEs, and combining NMTCs with other incentives.
• Solar ITC and Investment Tax Credits for Renewable Energy. The Section 48 investment tax credit for solar and other renewable energy systems in commercial real estate.
• Layering Multiple Credits: LIHTC, HTC, and NMTC. Structuring deals with two or three overlapping federal tax credit programs, basis adjustments, and investor coordination.
• LIHTC 101: How the Program Works (4% vs 9%). The foundational guide to the Low-Income Housing Tax Credit, credit calculation mechanics, and the structural differences between 4% and 9% deals.

Sources

• 26 U.S.C. Section 45L, New energy efficient home credit (Cornell LII)
• IRS Notice 2023-65, Guidance on the Section 45L New Energy Efficient Home Credit
• IRS, Instructions for Form 8908, Energy Efficient Home Credit (Rev. December 2025)
• IRS, Credit for Builders of Energy-Efficient Homes
• IRS, Internal Revenue Bulletin 2008-12 (Notice 2008-35)
• ENERGY STAR, Section 45L Tax Credit for Home Builders
• ENERGY STAR, Introduction to the ENERGY STAR Multifamily New Construction (MFNC) Program (revised August 1, 2025)
• ENERGY STAR, Introduction to the ENERGY STAR Single-Family New Homes (SFNH) Program (revised August 1, 2025)
• U.S. Department of Energy, Section 45L Tax Credits for DOE Efficient New Homes
• U.S. Department of Energy, DOE Efficient New Homes Program
• U.S. Department of Energy, DOE Efficient New Homes Multifamily Version 2
• U.S. Department of Energy, DOE Efficient New Homes Multifamily National Program Requirements, Version 2 (Rev. 2)
• 26 U.S.C. Section 45(b)(7)(B), Correction and penalty related to failure to satisfy wage requirements (Cornell LII)
• 24 CFR Section 92.354, Labor (HOME program) (Cornell LII)
• 26 U.S.C. Section 168, Accelerated cost recovery system, including Pub. L. 119-21 section 70301 notes (Cornell LII)
• Pub. L. 115-97, Section 13201 (U.S. Government Publishing Office)
• IRS Publication 946, How To Depreciate Property
• IRS Notice 2026-11, Interim Guidance on Additional First Year Depreciation Deduction under Section 168(k)
• 26 U.S.C. Section 39, Carryback and carryforward of unused credits (Cornell LII)
• 26 CFR Section 1.704-1, Partner's distributive share (Cornell LII)