The Low-Income Housing Tax Credit program is a federal government initiative which gives designated agencies authority over a roughly $8 billion budget for the purpose of providing tax credits for the acquisition, rehabilitation, or construction of rental housing for lower-income households. Enacted as a part of the Tax Reform Act of 1986, the LIHTC program is meant to incentivize developers to create low-income housing by offering a 10-year credit on federal income tax. Without the incentive, affordable rental housing projects would not be as appealing to multifamily investors, since they otherwise might not generate sufficient profit to justify investment.

Simply put, the low-income housing tax credit program subsidizes the acquisition, rehabilitation, or construction of affordable rental housing. The program functions as follows: The federal government grants state and territorial governments authority over a predetermined budget. State housing agencies can then award tax credits to private developers through a competitive process. Developers awarded low-income housing tax credits typically sell credits to private investors in order to obtain funding for a project.

The purpose of the LIHTC program is to incentivize developers to create low-income housing by offering a 10-year credit on federal income tax, thus providing tax credits for the acquisition, rehabilitation, or construction of rental housing for lower-income households.

The LIHTC program was initially created in 1986 as part of that year’s Tax Reform Act. The LIHTC is not a tax deduction (which would reduce a borrower’s taxable income). Instead, the credit provides a specific dollar amount tax discount, which can be applied to the investor or developer’s exact tax bill. In order to continue to take advantage of the tax credit, a developer must continue to keep their property in compliance. In 2016, the LIHTC program provided investors and developers approximately $8 billion in tax credits.

While the LIHTC program is technically federal in nature, in practice, the program is administered by individual states. Individual state Housing Finance Authorities (HFAs) are generally responsible for approving and LIHTCs to investors and developers on a by-project basis. Every state has what’s called a Qualified Allocation Plan (QAP), which details its exact requirements for LIHTC projects, which are typically stricter than the overall federal requirements. Some states have specific preferences towards one type of affordable housing, such as acquisition and rehabilitation or new construction, and may decide to allocate credits to one off these areas before others.

The federal government allocates a specific amount of credits to each state, based on the state’s population and a pre-determined multiplier. As both of these numbers can change, the amount of credits a state can get varies significantly. In 2018, the state multiplier was 2.40, so, for example, Florida, with a population of 20.98 million, would have a maximum of $50,352,000 in tax credits available for that year.

As of 2017, the minimum allocation for states was set at $2.69 million, to ensure that smaller states, like Wyoming and Alaska, would still effectively be able to make use of the program.

In order for a property to be considered eligible for the LIHTC program, it must pass at least one of these three affordability tests:

• 20% or more of the units are occupied by (or reserved for) tenants with an income of 50% or less of the area median income (AMI).
• 40% or more of the units are occupied by (or reserved for) tenants with an income of 60% or less of the AMI.
• 40% or more of the units are occupied by (or reserved for) tenants with an income of no more than 60% of the AMI, and the property has no units occupied by tenants with an income greater than 80% of the AMI.

In addition to the above, a gross rent test must also be passed. This test requires that rents for the property do not exceed 30% of either 50% or 60% of AMI (the exact percentage depends on the number of rental units set aside for the credit). LIHTC properties are required to pass these income and rent tests for a period of no less than 15 years — or risk having the tax credits recaptured by the local housing authority.

For more information, please see Low-Income Housing Tax Credit and LIHTC: Low Income Housing Tax Credits in Commercial Real Estate.

The Low-Income Housing Tax Credit (LIHTC) program is a federal government tax credit that helps facilitate the construction and rehabilitation of 3.6 million affordable housing units throughout the U.S. Benefits of the LIHTC program include a dollar-for-dollar reduction in an investor’s tax liability, which can be incredibly attractive. LIHTCs help fund the new construction and rehabilitation of a variety of different property types, including traditional apartments, single-family homes, and two- to four-unit multifamily properties. In addition, LIHTCs can fund the conversion of structures like schools, warehouses, and motels into multifamily properties. Properties using these credits must generally cap rents for some or all of the units at a certain percentage of a location’s area median income, or AMI. Nonprofits can also benefit from the LIHTC program, as each state is mandated to set aside 10% of its LIHTC funds for nonprofit developers, and at the end of the 15-year compliance period, nonprofits can generally exercise an option to buy the property in question. This gives the LIHTC investor/syndicator a ready buyer, while helping the nonprofit create a permanent source of affordable housing. Plus, as the developer of the property, the nonprofit will generally receive various fees (for example, developer fees and partnership management fees) that can help it pay its overhead expenses.

In order to apply for the LIHTC program, you must first submit a project proposal to your state's Housing Finance Agency (HFA). If the HFA approves the credits, the next step is to negotiate a Land Use Restrictive Agreement (LURA). The LURA establishes a maximum limit for rents that the owner of a property can charge, which is usually based on a specific percentage of the area median income. After negotiations, the project can begin construction or rehabilitation. Once complete, the property can be certified by the HFA, after which units are ready for leasing. All communities must be recertified on an annual basis in order for investors or developers to continue to receive the tax credits.

In addition to submitting a project proposal, the property must also meet certain eligibility requirements. The LIHTC program is available for various property types, including apartment buildings, single-family homes, townhouses, and duplexes. In order for a property to be considered eligible for the program, it must pass at least one of three affordability tests. These tests require that 20% or more of the units are occupied by (or reserved for) tenants with an income of 50% or less of the area median income (AMI), 40% or more of the units are occupied by (or reserved for) tenants with an income of 60% or less of the AMI, or 40% or more of the units are occupied by (or reserved for) tenants with an income of no more than 60% of the AMI, and the property has no units occupied by tenants with an income greater than 80% of the AMI. In addition, a gross rent test must also be passed, which requires that rents for the property do not exceed 30% of either 50% or 60% of AMI (the exact percentage depends on the number of rental units set aside for the credit).

For more information, please visit Apartment.Loans.

The LIHTC program provides a specific dollar amount tax discount, which can be applied to the investor or developer’s exact tax bill. Investors are then able to claim the LIHTC over a 10-year period.

According to Multifamily.loans, in 2016, the LIHTC program provided investors and developers approximately $8 billion in tax credits. The federal government allocates a specific amount of credits to each state, based on the state’s population and a pre-determined multiplier. As of 2017, the minimum allocation for states was set at $2.69 million.

According to Apartment.loans, the LIHTC program is executed by individual state Housing Finance Authorities (HFAs), which are responsible for approving LIHTCs to investors and developers on a project-by-project basis. Each state has a Qualified Allocation Plan (QAP), created to detail specific eligibility requirements for LIHTC projects, which are typically stricter than at the federal level.