What is the LIHTC program and how does it work? – Low Income Housing Tax Credits, or LIHTC, subsidize the acquisition, construction, and rehabilitation of affordable rental housing for low and moderate income renters.
In 1986, the Tax Reform Act enacted the LIHTC and it has been amended numerous times since then. Since its inception in the mid-1990s, the LIHTC program has supported the construction or rehabilitation of more than 110,000 affordable rental units each year (though there was a sharp decline after the Great Recession of 2008-2009), totaling more than 2 million units.
To facilitate this, the federal government provides tax credits to the states and territories. These loans are then awarded by state housing agencies to private developers of affordable rental housing. Promoters usually sell these credits to private investors to fund the development. Investors can claim the LIHTC for 10 years once the housing project is commissioned (basically made available to tenants).
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Eligibility for Low Income Housing Tax Credit
Renters can receive the LIHTC on a variety of rental properties, including apartment buildings, single-family homes, townhomes, and duplexes. 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.
It is required that the gross rental rates do not exceed 30 percent of the AMI, depending on the percentage of tax credit units in the project. Rent and income tests must be met by LIHTC projects for 15 years or credits will be forfeited. Additionally, a long compliance period (totaling 30 years) is generally required.
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Lihtc program apartments
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.
How does the low income housing tax credit program work
The LIHTC is limited by Congress to a certain amount in any one year. Each state received an initial $2.765 million or $2.4 per capita in 2018. In addition, Congress increased these numbers by 12.5 percent from 2018 through 2021, to $ 3.1 million and $ 2.70, respectively.
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A state housing finance authority credit allocation is not required for projects financed with tax-exempt bonds. To access 30 percent of the current value of LIHTCs, the State must approve the use of these bonds.
Investors often purchase LIHTCs from developers, who can use them more effectively, along with other housing projects’ tax benefits (e.g. depreciation, interest paid, net operating losses). Additionally, investors contribute equity capital often through syndicates and associations. The limited partners or investors are often passive participants, receiving tax benefits associated with the project but not taking part in day-to-day management or oversight.
A majority of the investors in LIHTC projects are corporations that have enough income tax liabilities to benefit from the nonrefundable tax credits. As financial institutions often receive credits from their regulators under the Community Reinvestment Act, they have historically been large investors due to their extensive income tax obligations and long planning horizons. Investing. Contributing investors cannot claim credits prior to the commissioning of the project.
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What are the Benefits of LIHTC Programs
About $ 9.5 billion is estimated to be spent annually on the LIHTC. 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. The efficiency of the program can also be attributed to the use of private sector incentives to develop, manage, and maintain affordable housing for low-income renters.
Those opposed to the LIHTC argue that the federal subsidy per unit of new construction is higher than is necessary because of the various intermediaries involved in its financing, including organizers, unions, general partners, managers, and investors – all of whom receive compensation for their work.
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Thus, a large portion of the federal tax subsidy does not go directly toward the construction of new rental housing. Another possible shortcoming, according to critics, is the complexity of the statute and regulations.
In addition, some state housing finance agencies approve LIHTC projects that are geared toward low-income communities that are traditionally segregated and have limited access to economic opportunities.
Finally, while the LIHTC can help build new affordable housing, maintaining that affordability is challenging once the required completion deadlines have been met. You can find more assistance and grants for seniors at https://getgovtgrants.com/
