IRS Updates Section 45L Tax Credit

On September 27, 2023, the Internal Revenue Service (IRS) issued Notice 2023-65, which introduced significant updates and changes to the Section 45L New Energy Efficient Home Credit. The crucial tax credit has been modified and extended through 2032 as part of the Inflation Reduction Act (IRA). With effect from January 1, 2023, this federal benefit is now directly linked to certification to a renewed version of the applicable ENERGY STAR program standards for eligible houses and apartments.


There are two levels of credit distribution: 

  • $5,000 for homes that fulfill the standards of the DOE’s Zero Energy Ready Home (ZERH) program; and 
  • $2,500 for homes certified as ENERGY STAR buildings.


Energy-efficient properties that install a renewable energy system may offset their total energy use and are classified as ZERH-compliant homes. But even if it’s a lofty goal, builders would benefit far more from attempting to fulfill the new ENERGY STAR version 3.1 criteria to be eligible for the $2,500 of 45L tax credit. 


What is the ENERGY STAR 3.1 Accreditation?

The U.S. Environmental Protection Agency (EPA) created the voluntary ENERGY STAR program to identify and encourage energy-efficient practices and products. The new set of rules (Version 3.1) enable builders to develop houses that satisfy energy efficiency standards and qualify for incentives, such as the 45L Builder Tax Credit.


New constructions must pass the Home Energy Rater inspection and receive a Home Energy Rating Score (HERS) higher than that of a reference design house in order to be recognized as an ENERGY STAR property. Any house constructed in a similar temperature zone and meeting ENERGY STAR standards is referred to as a Reference Design Home.


Builders can utilize RESNET-accredited HERS software to match their house score to the HERS index and obtain an appropriate HERS target score. 


After getting recognized as an ENERGY STAR property, builders need to fulfill the following forms and checklists:

  • National HVAC Design Report
  • National Rater Design Review Checklist
  • National Water Management Builder Requirements
  • National Rater Field Checklist
  • National HVAC Commissioning Checklist

Requirements of ENERGY STAR 3.1

  • Strict energy efficiency standards
    Energy Star 3.1 establishes strict energy efficiency standards for a range of appliances, including dishwashers, washing machines, refrigerators, and televisions. These requirements guarantee that the appliances use less energy when in use, which lowers consumers’ power costs.

  • HVAC systems
    Energy Star 3.1 lays forth specifications for HVAC systems, which include furnaces, heat pumps, and air conditioners. These systems have to be as energy-efficient as possible while maintaining the highest levels of interior comfort.

  • Doors and windows
    Energy-efficient doors and windows assist regulate indoor temperature and lessen the need for heating or cooling, which lowers energy consumption.

  • Insulation and Sealing

    To reduce energy leaks, Energy Star 3.1 promotes appropriate building insulation and sealing. Stable interior temperatures are ensured by adequate insulation, which lessens the demand on heating and cooling systems.

  • Lighting

    The initiative encourages the use of energy-efficient lighting, such as LED fixtures and bulbs, which use a lot less energy and last longer than conventional incandescent lights.

  • Water Heating Systems
    Energy Star 3.1 encourages the adoption of technologies that reduce energy loss and maximize the delivery of hot water by establishing standards for energy-efficient water heaters.


The Section 45L tax credit continues to be a valuable incentive for builders and developers who construct energy-efficient homes. However, the recent changes to ENERGY STAR requirements have made it more critical for builders to stay informed and comply with the new requirements. By understanding these changes and adapting their practices accordingly, builders can continue to benefit from this incentive while contributing to a more sustainable future. 


If you are in the construction industry, it’s advisable to consult a tax expert like National Tax Group to ensure compliance with the latest regulations and maximize the benefits of the Section 45L tax credit.

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