Explaining Low-Income Housing Tax Credits

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Everyone deserves a warm and safe place to sleep at night. Although luxury apartments and high rises are the projects making headlines, there is a tremendous demand for housing in distressed neighborhoods nationwide. The government has responded with a group of tax credit programs that incentivize real estate developers to act. Here’s what you should know about Low-Income Housing Tax Credits.

What are Low-Income Housing Tax Credits?
The Low-Income Housing Tax Credit (LIHTC) was created under the 1986 Tax Reform Act to support the creation of affordable housing across the country. Since the program’s creation, it has funded more than 3 million units of affordable housing, providing daily value to tens of millions of Americans.

How does the Low-Income Tax Credit program work?
The federal government issues LIHTCs to individual state governments. Each state’s housing agency is responsible for awarding its credits to real estate developers who commit themselves to creating affordable housing. Some individual states also have their own state-run programs dedicated to providing financial support for low-income housing developments.

Which projects qualify for Low-Income Housing Tax Credits?
Not all housing projects will qualify for the LIHTC. Upon applying for the credit, a developer must agree to comply with one of the following criteria:

  • 20% or more of the project’s units will be occupied by tenants with an income of 50% or less of the area median income (AMI)
  • 40% or more of the units will be occupied by tenants with an income of 60% or less of the AMI
  • 40% or more of the units will be occupied by tenants with income averaging no more than 60% of the AMI AND no units will be occupied by tenants whose income is greater than 80% of the AMI

How much is a Low-Income Housing Tax Credit?
There are two types of LIHTCs that may be claimed by an eligible party: the 9% credit and the 4% credit.

The 9% tax credit is reserved for new construction or major rehabilitation projects funded with conventional debt and without federal subsidies. This 9% allocation will yield tax credits over 10 years with a 70% present value credit.

The 4% tax credit is typically applied to smaller rehabilitation projects financed with tax-exempt bonds. This 4% allocation will yield tax credits over 10 years with a 30% present value credit.

How are Low-Income Housing Tax Credits Allocated?
Because the program’s budget is determined by Congress, there is a limit on the number of LIHTCs that may be awarded in a given year. Currently, each state is allocated $3,166,875 or $2.75625 per capita, whichever is larger.

The tax credit distribution process varies slightly from state to state, but credits are generally awarded through a competitive process that prioritizes projects based on their potential impact. For example, projects that guarantee lower rents for longer periods of time will be received more favorably. Working alongside a tax credit consultant is an effective way to structure your project in a way that garners state support.

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We’ve seen too many real estate developers struggle to close the gap between their ideas and the funding needed to bring them to life. Our tax credit consultants will explore every possible credit for your next real estate project and lead the process for acquiring them.

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