Tax Credits for Apartment Complexes

The U.S. Department of Housing and Urban Development operates a program that encourages the investment and development of apartment complexes and other housing for low-income families. Investors receive incentives from the program in two ways. First, they receive incentives through tax credits, which reduce the investors' total tax owed. Second, investors can sell these tax credits to raise capital for future real estate projects.

  1. The LIHTC Program

    • The Low Income Housing Tax Credit Program, or the LIHTC program for short, is a program that gives real estate investors an incentive to invest in housing for individuals and families on low incomes. In exchange for renting out housing to those on low income, real estate investors and developers receive a tax credit, which is a deduction on the total amount of tax owed on the specific property. Investors and developers can then sell these tax credits to raise capital if they choose to do so. By selling tax credits, investors do not have to borrow as much financing, which in turn encourages further investment in low-income housing projects.

    Rent Requirements

    • To qualify for the LIHTC program, real estate developers and investors must abide by rent limits. Determined by the Department of Housing and Urban Development (HUD), rent limits are a percentage of the local area's median income. The limits also take into account costs associated with utilities in the local area. HUD determines rent limits by taking the HUD-determined very-low-income level for the area and adjusting for household size and apartment size. The larger the family and the bigger the apartment, the greater the rent limit.

    Threshold Requirements

    • In addition to rent requirements, investors and developers must abide by one of two threshold requirements. Tenant incomes decide these thresholds. The first of these requirements is the 20-50 rule, which states that families earning at or below 50 percent of the area's median income should occupy 20 percent of the investor's units of housing. Alternatively, the investor can abide by the 40-60 rule, which states that households that earn at or below 60 percent of the area's median income should occupy 40 percent of the landlord's property. HUD determines these area-specific median incomes.

    Selling Tax Credits

    • The process of selling tax credits is known as syndication. The LIHTC program is valid for investors over a 10-year period, and any tax credits accrue annually. However, these tax credits are normally insufficient to use for further property investment. Therefore, the investor can claim future tax credits if he already conforms to the program's rent and threshold requirements. Only partners of the property investor can buy these tax credits, specifically in the form of limited partnerships or limited liability partnerships.

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