What is the LIHTC program and how does it work? – The Low Income Housing Tax Credit is a tax incentive designed for housing developers to develop approaches to rehabilitate housing for low-income families and individuals. The federal tax credit was retained in the Tax Reform Act of 1986.
The credits available to developers are based on the number of low-income housing apartments or units that the developer has planned to construct. To qualify for LIHTC eligible properties applicants must find an accredited tax credit property and have income less than 60% of the area median income. This guide will provide an overview of LIHTC Program.
Highlights of this Post
What Is The Low-Income Housing Tax Credit?
The Federal government has designed the Free Government Grants for low income families in the form of Low-Income Housing Tax Credit to boost the creation of affordable housing opportunities for low as well as middle-income individuals and families in America. Two main types of federal tax credits are available to housing developers through this program.
The first is a 9% credit that can be used when developers have not applied government subsidies or other federal credits to their building project. The second type is a 4% credit that can be used in combination with other federal tax credits. Such credits can be applied over a period of 10 years and they cover the entire taxable expense for the building project.
The federal tax credits are distributed to every state by the federal government to benefit the housing developers depending on their housing project. It is important to note that not every investor or developer can reap the advantage of the tax credit designed since the applications have exceeded the available permits issued for housing construction.
What Are The Features Of The Low-Income Housing Tax Credit Program?
The program helps to boost the ability of affordable rental housing in the country
- The program subsidizes development of low-income housing by providing a 10-year tax credit for housing projects
- The program has subsidized around 3 million housing units in America since its inception
- Low-income Housing Tax Credit Act program provides eligible developers with non-refundable and transferable tax credits that subsidize the construction and rehabilitation of housing development with stringent income limitations for qualified tenants.
- The housing project receiving benefits through this program should agree to rent to low-income tenants who are earning less than the area’s median income for 15 years.
How Does The Low-Income Housing Tax Credit Work?
The LIHTC program provides local and state government agencies with the right to distribute approximately $9 million every year in federal tax credits. $40 of federal tax credit received by housing developers reduces around a dollar worth of their income tax owed to the federal government.
- Developers of low-cost rental housing developments can apply to the program for availing of housing tax credit benefits. Once the credit is received developers can look for potential investors to construct affordable housing.
- The middleman bridges the gap between the project and the potential investors and pools the money of investors in equity funds. In return to provide the growth funds the investors get a stream of federal tax credits.
- The highest rent charged will be based on the average income of the region and is generally capped at 80% of the area’s median income. The rental cost should be reasonable during the period of 15 years and an additional usage period of 15 years.
- The program offers a subsidy of 30% or 70% of the cost in affordable unit rental projects. The 30% ( 4% of the tax credit) is made available for new construction that can be used for the acquisition cost of the existing buildings with additional subsidy. On the other hand, 70% subsidy ( 9% tax credit) helps to support new construction if there are no federal subsidies or additional tax credits involved.
LIHTC Program Apartments
Taxpayers claim annual credits equal to a percentage multiplied by the qualifying base of their project. Accordingly, the qualifying basis is equal to that portion of the cost of the housing project which is rented to tenants who meet the income requirements.
It is common for developers or owners of LIHTC projects to intend to rent 100 percent of the units to eligible tenants. Enhanced tax credits can be allocated by state funding agencies to qualifying projects in areas where rental housing is most in demand.
Originally, the LIHTC statute specified that the IRS would periodically adjust the specified credit percentages to maintain the 10-year tax credit stream’s present value at 70 or 30 percent of the qualified base.
Since 2008, Congress has mandated that a credit line providing 70 percent or more of current value must have a minimum rate of 9 percent, regardless of the prevailing interest rate. As a result, the present value of credits claimed over 10 years will exceed 70 percent of the qualified base in an environment of low interest rates
What Are The Eligibility Criteria To Qualify For The Low Income Housing Tax Credit?
The Low Income Housing Tax Credit approves a wide variety of properties including duplexes, single-family homes, townhouses and apartment complexes. To qualify as a mistress, developers or property owners need to meet certain requirements concerning the income level and the amount of rent they charge.
Those who receive LIHTCs must meet income requirements for tenants and gross rent requirements. Those who meet the income requirement can do so in three ways
LIHTC program income guidelines
- A minimum of 20% of the project’s units are occupied by tenants whose income is less than 50 percent of the Area Median Income (AMI).
- A minimum of 40% of the units are occupied by tenants with an income below 60% of the area median income.
- Rents for at least 40 percent of the units are not above 60 percent of AMI, and no units are occupied by tenants earning more than 80 percent of AMI
The projects receiving benefits of Low-Income Housing Tax credit should continue to meet one of these three income criteria for a period of 15 years. In case the project does not comply with the needs and requirements the value of the federal tax credit may be reclaimed. A common criticism of the Low-Income Housing Tax Credit is that a lot of properties and rooms in some regions of America become unaffordable for low-income individuals and families after 15 years.
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How To Apply For Low-Income Housing Tax Credit?
To know How to Find low-income housing with no waiting list let’s take a look at the application procedure to get approval.
Find Application For Low-Income Housing Tax Credit For Your State
The Low Income Housing Tax Credit Program has a similar application for investors and developers in all the states as it is a federal tax credit however the program is administered or managed by individual states.
In other words, the application procedure can somewhat be different based on where the housing project is taking place. A lot of jurisdictions in the states of America require an application site visit as well as detailed data about the property and the surrounding neighborhood. You can look for the information on the application procedure in your respective state to understand how to get approval.
Fill Out The Application Form
The next step is to understand the eligibility criteria and fill out the application. You can increase your chance of getting approval by going beyond and above the minimum requirements set by the program.
For instance instead of making only 20% of housing units available to individuals and families earning less than 50% of the area’s median income you can go for 30% or 40% of your units. The state government will likely approve housing projects that deliver more low-cost housing opportunities to low-income residents.
Submit The Form And Wait For Approval
Once you fill out the application form, the next step is waiting for the form to be approved or denied. They may be requested to provide additional materials and paperwork with their application. Approval for the application depends on how you have filed the application and how your state reacts to your proposed project.
What Advantages Does The Low-Income Housing Tax Credit Program Provide?
Long Term Housing Affordability
The Low-income Housing Tax Credit Act requires that low-cost housing units must remain for an extended period typically 15 years or more. This long-term commitment ensures long-term housing affordability for low-income individuals and families who are relying on LIHTC properties to meet their housing needs.
Reduced Financial And Housing Burden
Finding an affordable rental or housing unit in America is a significant burden, especially for low-income households. The low-income housing tax credit program contributes to reducing the financial burden and stress associated with high housing costs and enables eligible families to allocate their savings or resources for other essential purposes.
Strengthen Communities And Economic Growth
Affordable housing projects are supported by the Low-income Housing Tax Credit Act program which in turn create more jobs at the time of construction and property management. The program gives a boost to the local economy and emphasizes more job opportunities for people thereby strengthening communities.
Increase The Number Of Affordable Housing Units
The Low-income Housing Tax Credit Act was a catalyst for constructing more low-cost rental units in apartments across the country for low-income families and individuals who are struggling to find suitable rental apartments. The program also boosts diversity in housing construction as low-cost housing options are available in various locations in America including the urban and suburban areas.
The program fosters the development of affordable housing units in regions that are considered economically distressed and in this way, the program helps in community revitalization. Residents of the economically depressed area get more opportunities and tend to improve their overall quality of life.
Who Administers The Low-Income Housing Tax Credit Program?
Low-income Housing Tax Credit Act is a dollar-for-dollar tax credit designed by the federal government to boost affordable housing investment in the country. The program is administered and managed by state housing finance agencies. Every state gets a specific allocation of credit based on the total population.
To qualify for the program the proposed housing development should include new construction of old existing units occupied by poor households of low income individuals and substantial rehabilitation. Applications for the program are received and evaluated every year under the eligible allocation scheme. Housing credit will be based on the amount of housing development cost as well as the percentage of affordable units within the development.
Who Are Not Eligible For The Low-Income Housing Tax Credit Program?
It is necessary to know the disqualification factors that can make an individual ineligible to receive benefits that come along with the Low-income Housing Tax Credit Act program. These factors are as follows
Poor Rental History
The program can seek your rental history before qualifying you to live in Low-income Housing Tax Credit Act program property. You need to give contact information and details of your previous landlords and on grounds of poor rental history or any other issues with the previous landlord can lead to disqualification.
Having a criminal record will not disqualify you automatically to apply for the Low-income Housing Tax Credit Act program property, however it can be challenging to obtain suitable accommodation if you have a criminal record. It also depends on the nature and the severity of the crime for which you were convicted.
False Information On Your Application
Giving fake and inauthentic information on your application will automatically disqualify you from the Low-income Housing Tax Credit Act program.
Poor Credit Report
The program will take your credit score and credit history into account before qualifying you for assistance. A damaged credit report or information about missing payments or late payments can disqualify you
What Are The Other Options For People Who Are Looking For Affordable Housing?
Affordable housing refers to a residential building or housing project that rents apartments or units to low-income tenants who are eligible for subsidized rent based on their family size, income or other factors and tend to receive housing vouchers from the government to pay their monthly rental payment.
Affordable or low-income housing units and apartments can either be operated by public housing authorities throughout America, or landlords who participate in government programs and receive payment on behalf of the tenants.
Apart from the Low Income Housing Tax Credit, there are other types of financial support and assistance programs available for low-income households in America for instance the Section 8 rental vouchers, public housing programs and subsidies by the Department of Housing and Urban Development. To qualify for assistance you need to make sure your income is less than 50% of the median income in your area of residence.
What Are The Eligibility Criteria To Live In Low-Income Housing Tax Credit Property?
Low-income Housing Tax Credit Act property is a viable option for candidates who are looking for affordable housing opportunities. To live in a Low-income Housing Tax Credit Act property an individual or family need to fulfill the following basic eligibility criteria:
- You must be a single person with or without children or a family
- You must meet the specific income and asset requirements and have income less than 60% of the year’s median income. The income limitation generally depends on the unit in the household and the number of household members present
- There is no criteria of citizenship to qualify for Low-income Housing Tax Credit Act.
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The Low Income Housing Tax Credit is designed by the government to encourage the construction of low-income housing opportunities for low-income families and individuals who are struggling to get shelter. Developers or investors can obtain substantial federal tax credits for constructing, renovating or purchasing properties that cater to low-income tenants who are earning at or less than the area median income. Potential tenants who are looking for low-income housing opportunities can locate Low-income Housing Tax Credit Act properties and meet the income requirements.
Read our blog post about other significant Federal Government Housing Grants For Low Income Families. If you are interested to learn more about other government grants and assistance programs to remain housed, check out our other Articles at Get Government Grants.
Frequently Asked Questions
What is the LIHTC program?
Low Income Housing Tax Credits, or LIHTC, subsidize the acquisition, construction, and rehabilitation of affordable rental housing for low and moderate income renters. The federal government provides tax credits to the states and territories.
How Does the LIHTC Program Help?
Low-income households are encouraged to create affordable rental housing through this federal program, which is by far the largest. It has increased the supply of affordable housing by a considerable amount for more than 30 years, according to supporters. A major market failure is addressed by the LIHTC: the lack of affordable housing in low-income communities.
What is 4% and 9% LIHTC credit?
Housing projects are eligible to get two types of credit: 9% credit and 4% credit. The credit can be claimed by investors for around 10 years and provided by the federal government to regional and state governments. State housing agencies offer credits to private developers of low-cost rental housing projects. 4% credit is for units that require simple renovation and ready for the rental market while 9% credit is for construction of new properties that require a lot of renovations.