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Understanding Low-Income Housing Tax Credits

The Low-Income Housing Tax Credit (LIHTC) is a complex and very important tool that Congress enacted to encourage private development of affordable housing. LIHTC has been a key component of preserving and expanding the number of affordable housing options. These tax credits lower your tax liability dollar for dollar and could be a great way to save on taxes and help your community.

 

How to Apply & Qualify for the Tax Credit

 

LIHTC provides a tax incentive to construct or rehabilitate affordable rental housing for low-income households. There are many types of rental properties that are eligible for LIHTC including single family homes, apartment buildings, and duplexes to name a few. The first step in the process is for a project owner to submit an application to a state authority, which will consider the application competitively. The application will include estimates of the expected cost of the project and how they plan to meet the income test.

 

A unit is considered affordable if the household is paying no more than 30 percent of its income for housing costs, including utilities. Owners or developers of projects receiving the LIHTC agree to meet an income test for tenants and a gross rent test. There are three ways to meet the income test:

 

  1. At least 20 percent of the project’s units are occupied by tenants with an income of 50 percent or less of area median income adjusted for family size (AMI).
  2. At least 40 percent of the units are occupied by tenants with an income of 60 percent or less of AMI.
  3. At least 40 percent of the units are occupied by tenants with income averaging no more than 60 percent of AMI, and no units are occupied by tenants with income greater than 80 percent of AMI.

 

The gross rent test requires that rents do not exceed 30 percent of either 50 or 60 percent of AMI, depending upon the share of tax credit rental units in the project. All LIHTC projects must comply with the income and rent tests for 15 years or credits are recaptured. The program criteria require affordable rents to low-income households for a period of at least 30 years. The criteria changes from state to state - so make sure you check the affordability period in the state you plan to have affordable housing.

 

Median Income adjusted for family (AMI) is used to measure how a family’s income compares to the median income of all families in a geographic area. It is commonly determined by HUD (US Department of Housing & Urban Development) and the median incomes vary geographically depending on the community.

 

Types of Credits

 

There are two types of Low Income Housing Credits - there is a 4 percent tax credit and a 9 percent tax credit depending on the financing source and structure. The 9% credit is the most common for the larger housing projects. Both of these credits produce newly constructed, rehabbed, or refinanced rental properties that meet the income test and affordability requirements.

 

There is a difference in how these credits are allocated. The 9 percent credit is for new construction or substantial rehabilitation. The 4 percent credit is for projects that receive at least 50 percent of their funding through tax-exempt bond financing. The 9 percent credit is also allocated to the states annually by the IRS to distribute to eligible projects through the state housing finance agencies, while the 4 percent credit qualifies for the tax credit without receiving an allocation from the state housing finance agency. The 4 percent credit applies individually, instead of through the state, so there is no ceiling amount on the total amount of 4 percent tax credits available in a given year, like the 9 percent credit.

 

Bottom Line

 

LIHTC is the longest running and currently the only national program to consistently produce affordable rental housing units. Other federal programs rely on LIHTC to preserve existing rental units and expand the number of rental units.  What I have provided is just some of the basic information about what LIHTC is, how to apply, how to qualify and the types of tax credits. This article just scratches the surface - there is so much that goes into a LIHTC deal. Talk to your CPA if you want to learn more about how you can get involved in LIHTC!

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