Section 45L Tax Credit Case Study
The federal Energy Efficient New Homes Tax Credit (“45L”) applies to single-family and multi-family dwelling units that are three stories or less above grade, that were constructed new or renovated and sold or leased as a primary residence between January 1, 2017, and December 31, 2021.
You can go back three years from your last timely filed tax return and acquire these credits. The law came about with the passage of the Energy Policy Act of 2005. The criteria is to improve the energy use of the dwelling unit and make it 50% better than it would have been if built or renovated back in 2006. You’re looking at more efficient heating and cooling systems, better windows, LED lighting, air sealing, water heaters, wall and attic insulation.
These are all energy conservation measures we all know to do. But what you need to know is when to install these measures. In what order do you install wall insulation versus air sealing versus air conditioners? Install these measures out of order and while you might have energy efficient measures they are not providing as much reduction as you’d think.
Take the heating and air conditioning system. We know that the system needs to run for 15 minutes ti reach its steady state, which is the point at which the system operates at 80% efficiency. But what happens when the system only runs for 8 minutes? What’s the operating efficiency then? Do the math. Take 8 and divide it by 15 (8 ÷ 15) equals 53%. now multiply 53% by the 80% efficiency of the system (53% x 80%) and the result is 42.4% effective efficiency. The same goes for the air conditioner.
So why do we install a HVAC systems that operates for only 8 minutes and not 15 minutes? Airflow. For you and I to stand in a run, have a conversation and not feel like the room is stuffy or that we’re in each other’s space, we need to have about 4.5 air changes per hour (ACH) on average. The way we build homes and offices allows for the air changes torech 10-15 ACH. In some cases this is a good thing, like in medical testing laboratories, or where a lot of people congregate at the same time. but for a residence? It reduces occupant comfort and occupant comfort drives occupant behavior and that leads to high energy bills.
Going back to that 80% system, assume you upgrade to a 96% efficient system and instead of a 13 SEER air conditioner you install a 16 SEER. New high efficiency equipment must mean lower energy use right? Wrong. If you haven’t reduce the ACH, and you cannot do that without measuring it, that new high efficient system will not operate any more efficiently than the old 80% system you just replace. All you’ve done is replace a old inefficient system for a new inefficient system.
The software used to calculate the energy savings can calculate accurately, but can miss some of the idiosyncrasies of how energy is consumed. If you just enter the basic information and leave it at that, many properties that should qualify will not. Knowing the building science behind energy use and how that affects the energy model the software creates can mean the difference between a property passing and a property failing to pass the criteria for qualifying for the tax credits.
When looing for someone to qualify your property for the 45L tax credits, make sure the people you’re choosing understand the science in addition to the software.