Carry Forward of Low-Income Housing Tax Credits to Future Years
The United States Department of Housing and Urban Development and the Internal Revenue Service have formed a partnership to provide Low-Income Housing Tax Credits to affordable housing developers. These tax credits help developers raise money to fund the construction or acquisition of low-income housing. Tax credits are allocated to developers or investors over a period of 10 years. Selling the rights to future credits is the process called syndication. Syndication helps to secure all the money needed to fund the project without having to wait 10 years for each annual tax credit allocation.
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Program Description
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Congress enacted the Low Income Housing Tax Credit Program in 1986 to encourage private companies to invest in affordable housing development. Developers of qualified projects are awarded tax credits. The developer sells the tax credits to investors to raise money to fund the project. The tax credit is a dollar-for-dollar reduction of tax liability. This differs from a tax deduction where only a percentage of the liability is offset. The tax credit is taken over a 10-year period. The amount of the credit is based on the original investment.
Allocating Tax Credits
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Each year the IRS allocates tax credits to state housing finance agencies. These agencies award credits to developers with a project that will benefit a low-income community. States are given $1.75 per resident in tax credits on an annual basis. Developers can apply for a tax credit award through a competitive basis. Federal law requires that projects that serve the lowest income families and rentals intended to remain affordable for the longest period of time be given a priority in the application process. The credit amount given to each project depends upon the cost to develop the housing and the amount of affordable units that will be provided to low-income families.
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How to Apply for Tax Credits
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You must meet eligibility criteria to apply to the Low Income Housing Tax Credit Program. You must be a rental property owner, set aside at least one or two housing units for low-income households, restrict the rents in those units, and keep the rents affordable for 30 years under the tax credit agreement. In addition to keeping the rents affordable for 30 years, the property owner must restrict those units to only low-income households. Tenants must certify their income on an annual basis. Developers that plan to acquire an existing building must complete rehabilitation work on the property to qualify for a tax credit.
Selling Rights to Future Credits
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Developers can either claim tax credit directly or sell the tax credit to raise equity for the housing development. The tax credits can be sold to an investor or a syndicator, which is a representative of a group of investors. Tax credits are claimed annually over a 10-year period by the property owner. Since the developers need the money up front to pay for the costs of construction or acquisition, he syndicates the credits (sells the rights to the future credits in exchange for all the money now). The tax credit purchaser must be a part of the property ownership, which can be in the form of a limited partnership or limited liability company.
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References
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