Tax Credits for Builders of Affordable Homes
Any individual or business trying to get involved in affordable rental housing should know that affordable home tax credits play a key role in the development. Through the federal government, builders can take advantage of affordable housing tax credits via the Low-Income Housing Tax Credit program. This particular program extends tax credits to builders and real estate developers on affordable housing. Developers should know about these types of tax credits to help them as well as investors when seeking funding for building affordable homes.
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LIHTC Program
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The purpose of the LIHTC program is to offer an incentive to builders and real estate developers to provide affordable housing. Builders generally need to charge renters the market rate to rent housing in order to earn an appropriate rate of return on their investment. However, a lot of low-income individuals or families cannot afford to pay the market rate. When builders undertake projects with tax credits, a lower investment amount and lower debt is the result, so builders can charge tenants a rental amount that is lower than the market rate while still being able to earn an acceptable return on their affordable home building investment.
Benefits
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Using an affordable home tax credit can directly reduce the amount of a taxpayer’s federal income tax liability. Over a period of 10 years, LIHTC tax credits can help reduce a builder’s tax liability. In many cases, builders prefer to have access to upfront cash in order to fund their affordable home development as needed. In these cases, builders often sell the tax credits to investors or syndicators who generally represent a group of investors. These investors provide funds for the development project and use the tax credits to reduce their own income tax liabilities.
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Availability
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A specified number of tax credits are allocated by the Internal Revenue Service to state agencies on an annual basis, and those agencies must award and pass on those tax credits to affordable home builders within a span of two years. Builders can compete for the tax credits by submitting applications to their state agency. The awarded amount is based on the amount of qualified low-income home units in the development project as well as the costs associated with the entire project. Tax-credit priority is granted to projects that are expected to aid the lowest-income families for the most number of years.
Eligibility
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To be eligible for an affordable home tax credit provided by the LIHTC program, the project must be a residential project and meet one of two requirements. The builder must either restrict rental on at least 20 percent of the home units for tenants earning no more than 50 percent of the median income in the area; or restrict unit rentals on at least 40 percent of the home units for tenants earning no more than 60 percent of the median income in the area. Those home units are required to remain rent-restricted for at least 30 years.
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