Under the One Big Beautiful Bill Act (OBBBA), the Tax Code (Code) has been modified to sunset 45L Credits much sooner than expected.
Overview of 45L Credits
For certain energy-efficient facilities in residential buildings, a tax credit is available under Section 45L of the Code. In order to qualify for the 45L Credit, owners must "acquire" or place in service "qualified new energy efficient home(s)." The amount of the 45L Credit fluctuates deal-to-deal based on various factors, including the amount of costs incurred, the use of Energy Star appliances and the payment of prevailing wages to contractors.
The 45L Credit was initially passed into law in 2005, and Congress expanded the 45L Credit in 2022. In addition to increases in the amount of the 45L Credit for meeting certain benchmarks, the 2022 changes also made the 45L Credit easier to deploy, particularly in low-income housing tax credit transactions. That expansion of the 45L Credit dramatically increased the use of 45L Credits in financing stacks. Many low-income housing tax credit deals that have recently closed or are in closing mode currently rely on 45L Credits.
New Sunset Timeline
Prior to passage of the OBBBA, the sunset date for the 45L Credit was related to buildings acquired after December 31, 2032. The OBBBA has moved up the sunset date for the 45L Credit: the 45L Credit will not be available for qualified buildings "acquired" after June 30, 2026. The sole definition in 45L of the Code for "acquired" is: "The term 'acquire' includes purchase." For projects under construction now, the term "acquired" will actually mean that the project has been placed in service. There is some discussion in the industry that to claim the 45L Credit, the project must also be fully leased.
Operators of low-income housing tax credits may want to review their equity documents and be in touch with their Reinhart attorney as soon as possible to help navigate discussions with equity investors to ensure a smooth transition of the 45L Credit sunset given the passage of the OBBBA.
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