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 Originally enacted as part of the Energy Policy Act of 2005 and codified as IRC Section 45L, the credit has been extended, modified, and expanded several times.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. Under current law, the credit applies to qualified new energy efficient homes acquired before July 1, 2026. That is the operative deadline for any developer considering 45L today.

Unlike many tax incentives that benefit property owners, Section 45L is a contractor-level credit. It is claimed by the person or entity that constructs the dwelling unit and sells, leases, or rents it to a person who uses it as a residence. This distinction is critical in multifamily development, where the party that "constructs" the building and the party that owns the building may be different entities within the same development structure.

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 in direct tax savings, not $1,000,000 in reduced taxable income. This makes 45L 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 multifamily dwelling units in buildings three stories or fewer above grade, 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.

How dwelling units in buildings above three stories are treated

A common point of confusion: the credit amounts described above ($500/$1,000 base, $2,500/$5,000 enhanced) apply specifically to dwelling units in buildings that are three stories or fewer above grade. For multifamily buildings above three stories, different (and generally lower) credit amounts apply under the IRA framework, and the applicable certification programs differ. Mid-rise and high-rise multifamily projects should consult the DOE Section 45L guidance for the specific requirements and credit levels that apply to those building types.

This article focuses on the low-rise multifamily segment (three stories or fewer above grade), which encompasses garden-style apartments, townhome communities, duplexes, triplexes, and other configurations common in suburban and exurban multifamily development. This is the segment where the highest per-unit credits are available and where 45L has the greatest impact on project economics.

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 unit must be built by a person in the trade or business of constructing dwelling units (discussed in detail below).
4. Acquired by a person from the eligible contractor. The unit must be purchased, leased, or rented by someone who uses it as a residence. In multifamily rental housing, the initial lease-up satisfies this requirement.
5. Certified to meet applicable energy standards. The unit must be certified as meeting either the ENERGY STAR or DOE Zero Energy Ready Home program requirements, depending on the credit tier being claimed.

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 has interpreted "acquired" to include the initial lease-up. When a tenant signs a lease and moves into a newly constructed apartment, 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 completes construction in March 2026 and leases up through May 2026 can claim credits for units as they are leased. Units leased before July 1, 2026 qualify. Units leased on or after July 1, 2026 do not, under the current OBBBA sunset.

Common dwelling types that qualify

• Garden-style apartment units (in buildings three stories or fewer above grade)
• Townhome-style rental units
• Duplex and triplex units (both for-sale and for-rent)
• Single-family rental homes (built-to-rent communities)
• Condominium units (for-sale, claimed by the builder)
• Units within mixed-use buildings, provided the residential units are in a portion of the building that is three stories or fewer above grade

What does NOT qualify

• Hotel and motel rooms (transient lodging, not residential)
• Units in buildings above three stories (different credit rules apply)
• Rehabilitated existing units (45L is for new construction only)
• Accessory dwelling units that do not have their own entrance, kitchen, and bathroom (they are not separate "dwelling units")
• Units that are not leased or sold by the end of the applicable deadline

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 dwelling units in buildings one to three stories above grade. The program requires compliance with a set of prescriptive and performance requirements that are designed to achieve at least 10% better energy performance than the IECC baseline code.

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. Typical incremental cost per unit for ENERGY STAR certification ranges from $1,500 to $4,000 above code-minimum construction, depending on the local energy code baseline, climate zone, and construction type.

DOE Zero Energy Ready Home (ZERH)

The DOE Zero Energy Ready Home program is substantially more rigorous than ENERGY STAR. A ZERH-certified home is designed and built to be so energy efficient that a renewable energy system could offset all or most of its annual energy consumption. The home does not need to have solar panels installed, but it must be efficient enough that adding them would bring it to net-zero.

ZERH builds on the ENERGY STAR platform and adds several additional requirements:

• Mandatory ENERGY STAR certification: ZERH requires ENERGY STAR certification as a prerequisite. The ZERH layer is additive, not alternative.
• 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 2015 IECC or the DOE ZERH insulation target, whichever is more stringent. Air leakage must be tested at or below specified ACH50 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.
• HERS Index target: Whole-building energy performance, as measured by a HERS rating, must meet the DOE ZERH target index, which is significantly lower (better) than ENERGY STAR requirements alone.

ZERH certification costs more. Typical incremental costs per unit range from $5,000 to $12,000 above code-minimum construction, 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.

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 $5,000 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 $5,000 to $12,000, this materially improves the economics. In favorable climate zones where incremental costs are $5,000 to $7,000, the ZERH credit covers roughly half the incremental cost. Combined with operating cost savings and utility incentives, ZERH becomes a strong financial case in prevailing-wage projects.

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 period. Prevailing wages must be paid from the start of construction through substantial completion. Partial compliance does not qualify.
• All tiers of subcontractors. The requirement runs down through the subcontractor chain. The general contractor is responsible for ensuring that all subs and sub-subs pay prevailing wages.

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, adding 5% to 20% to labor costs depending 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. At typical multifamily construction costs, prevailing wage premiums of 5% to 15% on labor costs translate to roughly $2,000 to $8,000 per unit in incremental cost. In many markets, the math clearly favors the prevailing wage path.

Correction and penalty provisions

The IRA includes a cure provision for prevailing wage failures. If a developer discovers that prevailing wages were not properly paid, the developer can make corrective payments to affected workers (including back pay plus interest) within a specified period and still claim the enhanced credit. The cure provision also requires payment of a penalty to the IRS. 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 constructs the home and sells it to a buyer. The builder claims the credit. In multifamily development, the question is substantially more complex because the contractual relationships between the developer, the general contractor, and the building owner can be structured in multiple ways.

Who is the "eligible contractor"?

Under IRC Section 45L, the credit is available to the "eligible contractor." The eligible contractor is defined as the person who constructed the qualified new energy efficient home (or, in the case of a manufactured home, the person who produced it). The person must be in the trade or business of constructing (or producing) homes.

In typical multifamily development, there are three parties that could potentially be the "eligible contractor":

1. The developer/owner entity: The LLC or LP that owns the land, holds the building permit, and will own the completed building. If the developer self-performs construction (acts as its own general contractor), it is likely the eligible contractor.
2. The general contractor: A separate entity under contract with the developer to construct the building. If the GC is constructing the dwelling units under a standard construction contract, the GC may be the eligible contractor.
3. The development manager: In some structures, a development management entity oversees construction on behalf of the owner. Whether this entity qualifies depends on the extent of its control over the construction process.

IRS guidance on multifamily

IRS guidance on this point has been limited, and the distinction matters because the credit is non-transferable between parties. The entity that claims the credit must be the eligible contractor. If the GC is the eligible contractor but the developer expected to claim the credit, the credit is lost (or improperly claimed, which creates audit risk).

The prevailing interpretation among tax professionals is that the determination depends on the facts and circumstances of the contractual arrangement. Key factors include:

• Which entity holds the building permit
• Which entity controls the construction process (hiring subs, directing work)
• Which entity bears construction risk (cost overruns, delays)
• How the construction contract characterizes the relationship

In a typical design-build or construction management at-risk arrangement, the GC is often the eligible contractor because the GC is the party "constructing" the dwelling units. In an owner-builder arrangement where the developer manages construction directly (with separate trade contracts), the developer is typically the eligible contractor.

Practical implications

Developers should address the eligible contractor question early in the deal, ideally at the time the construction contract is negotiated. The construction contract can specify which party is entitled to claim the 45L credit, though the contractual allocation does not override the statutory definition. If the GC is the eligible contractor, the developer may negotiate a credit-sharing arrangement through the construction contract (reducing the contract price by the credit amount, or including a provision for the GC to assign the economic benefit of the credit to the developer).

Tax counsel should review the structure before construction begins. A post-construction determination that the wrong entity claimed the credit creates significant problems: the credit may be disallowed on audit, interest and penalties apply, and the statute of limitations on correcting the claim may have run.

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.

Project assumptions

Table 4. Assumptions for the 200-unit worked example. The project is already paying prevailing wages due to its LIHTC bond financing, so the prevailing wage requirement for 45L imposes no incremental labor cost.

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, but it reduces the net cost from $1,900,000 to $900,000. 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. Energy Star with prevailing wages approximately breaks even on incremental cost in many markets. 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 tax reduction, not a deduction. For a developer entity in a 37% marginal tax bracket, a $1,000,000 deduction saves $370,000. A $1,000,000 credit saves $1,000,000. The credit is 2.7x more valuable than a deduction of the same nominal amount.

Applied to the developer's equity position, the 45L credit typically improves levered IRR by 50 to 150 basis points, depending on the equity contribution, leverage ratio, and hold period assumptions. On a project with $12,000,000 in developer equity, a $1,000,000 credit received in Year 1 of operations represents an 8.3% cash-on-equity boost in that year.

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 drawn from published DOE research, NAHB builder surveys, and discussions with multifamily GCs active in garden-style development.

Table 8. Approximate 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. Certification fees are estimated at $1,000 per unit for Energy Star and $1,500 per unit for ZERH.

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. Net cost: $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.

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. Net cost: $800,000. The credit covers 56% of the incremental cost. This is the strongest financial case for ZERH, particularly in projects where prevailing wages are already required.

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 and ZERH certified units consume 10% to 50% less energy than code-minimum units, depending on climate and building type. 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 are complementary tax strategies, not competing ones. They operate through different mechanisms and reduce tax liability through different line items on the return. Combining them can materially improve after-tax returns on new multifamily construction.

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 does not affect depreciable basis, depreciation schedules, or cost recovery calculations.

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). Accelerated depreciation generates larger deductions in early years, deferring tax liability. Under current law, bonus depreciation phases down from 100% (for assets placed in service before January 1, 2023) to 40% in 2026. The deductions reduce taxable income, not tax liability directly.

The two strategies operate on different parts of the tax return: 45L reduces the tax itself, cost segregation reduces the income that the tax is calculated on. There is no double-counting or interaction between them, and claiming one does not preclude claiming the other.

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. At placed-in-service: Complete energy certification testing and documentation. Finalize the cost segregation study with as-built data.
3. On the tax return: Claim the 45L credit on Form 8908. Report accelerated depreciation from the cost segregation study on the depreciation schedule.

Combined impact example

Continuing the 200-unit ZERH example from above:

• 45L credit: $1,000,000 (200 units × $5,000 per unit)
• Cost segregation (estimated): A $62,000,000 multifamily project might reclassify 15% to 25% of the depreciable basis to shorter-lived asset classes, generating $2,000,000 to $3,500,000 in first-year accelerated depreciation deductions (at 40% bonus depreciation in 2026). At a 37% marginal tax rate, that is $740,000 to $1,295,000 in first-year tax savings from accelerated depreciation alone.
• Combined first-year tax benefit: $1,740,000 to $2,295,000 (45L credit plus cost segregation tax savings).

On $12,000,000 in developer equity, a combined first-year tax benefit of approximately $2,000,000 represents a 16.7% return on equity from tax benefits alone, before any operating cash flow. This is why experienced multifamily developers rarely pursue 45L or cost segregation in isolation. They layer both strategies from the start of the development process.

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 acquired when a tenant signs a lease and takes occupancy. Units that are physically completed but not yet leased as of June 30, 2026 do not qualify. This creates operational urgency for projects nearing completion: the lease-up schedule, not just the construction schedule, determines whether the credit is available.

Consider a 200-unit project where construction completes in April 2026 and lease-up proceeds at a pace of 25 units per month. By June 30, 2026, approximately 75 units are leased. The remaining 125 units are leased between July and November 2026. Under the current 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).

Is an extension likely?

Section 45L has been extended multiple times since its original enactment in 2005. The credit was extended in 2008, 2013, 2015, 2017, 2018 (retroactively), and was substantially restructured by the IRA in 2022. However, the OBBBA's broad rollback of IRA clean energy provisions suggests that the political conditions for a further extension are different from past cycles. The National Association of Home Builders (NAHB) and other industry groups have advocated for an extension, but as of August 2026, no legislative vehicle for an extension has advanced through committee.

Developers should underwrite their projects assuming the credit expires as scheduled. If an extension occurs, it will improve returns. If it does not, the pro forma should still work. Treating the credit as optional upside, not required equity, is the prudent approach.

Timeline implications for active projects

For projects currently in design or early construction, the June 30, 2026 deadline creates a tight window:

• Projects in construction (expected completion Q1-Q2 2026): The critical variable is lease-up pace, not construction timeline. Accelerate pre-leasing. Begin marketing before the certificate of occupancy is issued. Every unit leased before July 1, 2026 captures the credit; every unit leased after that date does not.
• Projects in late design (expected construction start Q3-Q4 2025): These projects are borderline. A 12-month construction schedule plus 3-6 months of lease-up pushes acquisition dates into late 2026 or early 2027. The 45L credit may be available for early units but not for the full project. Model the credit on a unit-by-unit basis tied to projected lease-up timing.
• Projects in early design (expected construction start 2026 or later): These projects are unlikely to place any units in service before July 1, 2026. Unless an extension is enacted, 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 qualified third-party inspector (HERS rater or equivalent) must certify that each dwelling unit meets the applicable Energy Star or ZERH requirements. The certification must be obtained before the tax return is filed.
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. Builder certification statement. The eligible contractor must provide a certification statement that the dwelling unit meets the applicable energy requirements. The Building Innovation Hub provides a detailed overview of the certification and documentation process.

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. The credit is allocated based on the partnership agreement's tax credit allocation provisions, which may differ from the profit and loss allocation. Investors and limited partners should confirm that the partnership agreement properly allocates 45L credits before closing.

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, and it cannot be carried back to prior years (though it can be carried forward under general business credit rules if it exceeds the taxpayer's current-year tax liability).

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.

• Assuming the building owner is the eligible contractor. In multifamily development, the GC is often the party that "constructs" the dwelling units. If the building owner claims the credit but the GC is the eligible contractor, the credit may be disallowed on audit. Resolve the eligible contractor question 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. ZERH costs $5,000 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.
• Counting units in buildings above three stories. The $500/$1,000/$2,500/$5,000 credit amounts apply only to units in buildings three stories or fewer above grade. Mid-rise and high-rise buildings have different (lower) credit amounts and different certification programs. Do not apply garden-style credit amounts to a six-story building.
• Treating the 45L credit as a deduction. The credit reduces tax liability dollar-for-dollar. Modeling it as a deduction understates its value by (1 minus the marginal tax rate). At a 37% marginal rate, a $1,000,000 deduction saves $370,000, while a $1,000,000 credit saves $1,000,000. Ensure the pro forma models the credit correctly.
• 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 finish construction in Q2 2026 but lease up over the following six months will lose the credit on units leased after June 30. Model the credit unit-by-unit based on the 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.
• Failing to coordinate 45L with cost segregation. The two strategies are complementary and should be planned together. 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.