The Low Income Housing Tax Credit Provides a Nice Break for Real Estate Owners and DevelopersUpdated March 3, 2016 Tax Credits
Creating an inventory of enough affordable housing is an ongoing challenge for many communities throughout the United States. The high cost of building and maintaining rental units is not easy to overcome.
Recognizing this, the IRS created the Low Income Housing Tax Credit (LIHTC) program. It is the largest affordable housing program in the country, accounting for about 90 percent of all affordable housing in the U.S. today, and gives private owners a real incentive to build and maintain affordable housing units.
Under the LIHTC program, the Internal Revenue Service distributes funds to each state on a per capita basis. In turn, each state has a housing agency that is responsible for allocating those credits to developers. The process for obtaining these funds is competitive among developers and uses criteria set forth by the state in a document known as a Qualified Allocation Plan. Because the process for obtaining these housing credits is competitive, developers may offer other housing benefits above what is minimally required to stand a better chance of winning the tax credits.
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Investors who receive these tax credits use them to reduce the amount of debt required to develop a project. In exchange, they agree to rent a certain number of units to tenants at rates below local market conditions.
When it was first created, the LIHTC program required a 15-year compliance period. But in 1989, that compliance period changed to 30 years as part of the Revenue Reconciliation Act. Some states require even longer periods.
Owners can choose between three occupancy restrictions when they receive LIHTC tax credits:
- At least 15 percent of units must be occupied by tenants with an income at or below 40 percent of AMI.
- At least 20 percent of units must be occupied by tenants with an income at or below 50 percent of AMI.
- At least 40 percent of units must be occupied by tenants with an income at or below 60 percent of AMI.
States are responsible for overseeing the ongoing compliance, quality and operation of the projects, along with the threat to report the developer to the IRS if guidelines are not met.
Records are required to be kept for each qualified tenant for at least 21 years, and owners must submit an annual compliance statement to the State Allocation Agency to ensure it is acting within established parameters.
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Those with low income may also greatly benefit from the Affordable Healthcare Act Tax Credit.