What Is the Low Income Housing Tax Credit?

The Low Income Housing Tax Credit provides private investors a tax credit to encourage development of affordable housing. The total amount of tax credits available to each state depends on state population. The credit may be applied to projects such as multifamily housing, single-family housing, and housing for the elderly and disabled.

History

The Low Income Housing Tax Credit was enacted by Congress in 1986 and can be found in Section 42 of the Internal Revenue Code. The program is regulated by the Treasury Department on the national level, and by state agencies on the state level. Section 42 amended in 1990 to require state agencies to monitor compliance with the federal code.

Scope

The Low Income Housing Tax Credit aims to encourage private investment in affordable housing projects. According to the National Low Income Housing Coalition (NLIHC), tax credits exceeding $790 million produced 74,663 housing units for low-income people in 2007. As of 2005, 1.4 million affordable housing units had been created under the tax credit.

How it Works

Tax credits directly reduce a taxpayer's tax liability, which makes them different from, and more powerful than, tax deductions, which merely reduce taxable income. Low Income Housing Tax Credits are awarded to developers of qualified projects, who then sell the tax credits to raise capital. This minimizes the debt incurred by the developer and allows the developer to offer more affordable rent. The investors reduce their taxes by the amount invested. As long as the property complies with program requirements, investors can claim the tax credit each year for a period of 10 years.

Eligibility

According to the U.S. Department of Housing and Urban Development (HUD), a project must meet four requirements to be eligible for the Low Income Housing Tax Credit:

1. The property must be a residential rental property.

2. The developer must commit to one of two possible low-income occupancy threshold requirements. These are the "20-50 Rule," where at least 20 percent of the units are rent-restricted and occupied by families with income at or below 50 percent of the HUD-determined area median income, and the "40-60 Rule," which requires at least 40 units to be rent-restricted and occupied by families with incomes at or below 60 percent of the HUD-determined area median income.

3. Rents, including utility charges, must be restricted in low-income units.

4. The developer must agree to operate under the rent and income restrictions for 30 years or longer, pursuant to a written agreement.

Problems

In a down economy, affordable housing developments under the program often fail to attract sufficient investment. To try to counter this, Congress increased the amount of credits available for 2009, but NLIHC said it was doubtful such an increase would be effective.

References

• Department of Housing and Urban Development
• National Low Income Housing Coalition