What Is Low-Income Housing Tax Credit (LIHTC)?

An in-depth exploration of the Low-Income Housing Tax Credit (LIHTC), its mechanisms, benefits, applicability, and impact on affordable housing development.

The Low-Income Housing Tax Credit (LIHTC) is a federal program in the United States that offers tax credits to developers as an incentive to create, purchase, or refurbish housing units that are designated for low-income families. Established under the Tax Reform Act of 1986, the program has become the principal financing tool for affordable rental housing in the U.S.

Mechanisms of LIHTC

The LIHTC program allocates tax credits to state and local governmental agencies based on population. These agencies, in turn, award the credits to private developers of affordable rental housing through a competitive process. The primary mechanism involves:

• Allocation of Tax Credits:

  • Tax credits are distributed to states based on population.
  • States then distribute these credits to developers via a competitive process.

• Tax Credit Pricing:

  • The tax credits can be used by developers to reduce their federal tax liability.
  • Developers often sell these credits to investors to raise capital.

• Compliance Period:

  • Developers must maintain affordable rents and comply with other program requirements for at least 15 years to avoid recapture of the credits.

Types of LIHTC

The LIHTC program is divided into two types based on the nature and extent of the development:

• 9% Tax Credit:

  • This generally covers new construction and substantial rehabilitation and provides a larger credit.

• 4% Tax Credit:

  • This is typically used for the acquisition and rehabilitation of existing buildings and provides a smaller credit.

Special Considerations

Several important factors and conditions must be observed to qualify for and maintain LIHTC, including:

• Income Limits:
  • The units must be rented to households with incomes at or below the area median income (AMI), adjusted for family size.
• Rent Restrictions:
  • Rents (including utility costs) must not exceed 30% of a qualifying household’s income.
• Affordability Period:
  • The property must comply with rent and income restrictions for a minimum of 15 years; however, an additional extended-use period of at least 15 years (totaling 30 years) is often required.

Examples of LIHTC in Action

Consider a developer planning to build a 50-unit apartment building where 40 units will be set aside for low-income families. By obtaining LIHTCs, the developer can sell these credits to investors to generate equity financing for the project. This reduces the need for high-interest loans and allows the developer to offer units at more affordable rent levels.

Historical Context

The LIHTC program was introduced as part of the Tax Reform Act of 1986. Its purpose was to encourage private investment in affordable housing during a time of growing concern over the diminishing stock of affordable rental units. Over the years, the LIHTC has facilitated the development of millions of affordable housing units across the U.S.

Applicability and Impact

LIHTC has a significant impact on the housing market, facilitating the development or preservation of affordable housing and contributing to community revitalization. The program incentivizes developers by providing a financial mechanism that encourages investment in low-income neighborhoods.

Comparisons and Related Terms

• New Markets Tax Credit (NMTC): A similar program that incentivizes investment in low-income communities.
• Historic Tax Credit (HTC): Provides tax credits for the rehabilitation of historic buildings.

FAQs

What is the LIHTC compliance period?

The compliance period is the timeframe during which the project must adhere to rent and income restrictions. It is at least 15 years, with many projects requiring an extended-use period making it 30 years in total.

How are LIHTCs allocated to states?

LIHTCs are allocated based on the state’s population, with specific calculations implemented annually by the IRS.

References

1. U.S. Department of Housing and Urban Development (HUD). “Low-Income Housing Tax Credits (LIHTC).” HUD.gov.
2. Internal Revenue Service (IRS). “Instructions for Form 8609: Low-Income Housing Credit Allocation and Certification.” IRS.gov.
3. Novogradac & Company LLP. “Introduction to Low-Income Housing Tax Credits.” Novoco.com.

Summary

The Low-Income Housing Tax Credit (LIHTC) is a pivotal program that incentivizes the development and preservation of affordable rental housing. Through a competitive allocation process, tax credits are awarded to developers, who, in turn, can sell these credits to investors to raise equity capital. This program has become essential for addressing housing affordability and has transformed how affordable housing is financed in the United States.