Key Takeaways
- Federal tax credits incentivize affordable housing development.
- Credits offset tax liability over 10 years.
- Projects must meet strict income and rent limits.
- Two credit types: 9% (new) and 4% (acquisition).
What is Low-Income Housing Tax Credit?
The Low-Income Housing Tax Credit (LIHTC) is a federal program created under Section 42 of the Internal Revenue Code to encourage private investment in affordable rental housing for low- and moderate-income households. It provides a dollar-for-dollar reduction in federal tax liability to investors supporting such projects.
This program is a key tool in addressing housing affordability by leveraging equity from investors like corporations or banks, similar to the way AGNC attracts capital in its sector, but focused on housing development.
Key Characteristics
LIHTC features several defining elements that shape its impact and operation:
- Federal Incentive: Offers tax credits to investors, reducing their federal tax bills directly.
- Allocation Process: States receive credits based on population and distribute them through competitive Qualified Allocation Plans (QAPs).
- Affordability Requirements: Projects must reserve either 20% of units for households earning ≤50% of Area Median Income (AMI) or 40% for ≤60% AMI.
- Compliance Period: Minimum 15 years of affordability, often extended to 30 years or more.
- Credit Types: Includes 9% credits for new construction and substantial rehab, and 4% credits often paired with tax-exempt bonds.
- Investor Role: Typically banks or corporations purchase credits, akin to how ability to pay taxation informs fiscal responsibilities.
How It Works
Developers obtain LIHTCs through state housing agencies, which allocate credits competitively based on local housing needs outlined in their QAP. The credits are sold to investors who provide upfront equity to fund construction or rehabilitation.
Investors claim credits annually over a 10-year period, reducing their federal tax liability proportionally to the credits earned. The program requires projects to maintain affordability standards verified through ongoing compliance, similar in oversight rigor to tracking T-accounts in accounting.
Examples and Use Cases
LIHTC has been instrumental in financing millions of affordable housing units nationwide, helping stabilize communities and support low-income families.
- Nonprofit Set-Asides: Nonprofits receive a 10% credit allocation, enabling mission-driven affordable housing development.
- Equity Partnerships: Large financial institutions, much like AGNC, invest in LIHTC projects to diversify portfolios and gain tax advantages.
- Compliance Enforcement: LIHTC projects undergo rigorous income verification and rent caps, paralleling the use of back-end ratios in assessing tenant affordability.
Important Considerations
While LIHTC is the largest source of affordable rental housing in the U.S., you should be aware of challenges like varying state QAP priorities and the potential for affordability requirements to lapse after compliance periods. Understanding the financial structuring, including how investors use credits, can inform your approach to affordable housing investments.
Additionally, tracking compliance and long-term affordability requires attention to detail reminiscent of managing deferred acquisition costs in finance. Staying informed on program updates and market conditions will help you navigate LIHTC opportunities effectively.
Final Words
The Low-Income Housing Tax Credit remains a critical tool for financing affordable rental housing by leveraging private investment through tax incentives. To explore your opportunities, consult your state’s Qualified Allocation Plan and consider speaking with a tax professional who specializes in housing finance.
Frequently Asked Questions
The Low-Income Housing Tax Credit (LIHTC) is a federal program created in 1986 to encourage private investment in affordable rental housing for low- and moderate-income households by providing tax credits to developers.
LIHTC gives developers tax credits they usually sell to investors to raise equity, which helps subsidize construction or rehabilitation costs. This enables developers to offer below-market rents to qualifying tenants.
Tenants must have incomes at or below 50% or 60% of the Area Median Income (AMI), depending on the project. Rents are capped at about 30% of the tenant's income to maintain affordability.
9% credits provide a higher subsidy and are usually awarded competitively for new construction or major rehab projects without other federal subsidies. 4% credits offer a lower subsidy, often used for acquisition or projects financed with tax-exempt bonds and are generally non-competitive.
Properties must comply with affordability rules for an initial 15-year period, which can be extended up to 30 or even 40 years. During this time, owners must rent units to eligible low-income tenants at restricted rents.
State housing agencies receive annual LIHTC allocations based on population and manage the competitive application process according to each state's Qualified Allocation Plan (QAP), which sets priorities based on local housing needs.
Yes, nonprofits receive a 10% set-aside of the state LIHTC allocations, allowing them to develop affordable housing projects under the program.
Investors buy LIHTC credits from developers to reduce their federal tax liability dollar-for-dollar over 10 years, providing a financial return while supporting affordable housing development.
