The Low-Income Housing Tax Credit (LIHTC) serves as a powerful economic incentive for housing developers to construct, purchase, or renovate housing specifically for low-income individuals and families. Initially established in the Tax Reform Act of 1986, LIHTC has since become a pivotal element in the promotion of affordable housing.
State and local agencies have the authority to distribute approximately $9 billion annually in federal tax credits. These credits provide developers with dollar-for-dollar reductions against their federal income tax liabilities.
However, eligibility and the amount of tax credits awarded are linked to the number of low-income housing units a developer commits to build. To qualify, prospective tenants typically must earn an income less than 60% of the Area Median Income (AMI).
Key Takeaways
- The LIHTC aims to facilitate the creation of affordable housing by offering a ten-year tax credit incentive.
- Various types of properties—such as single-family homes, multifamily units, apartment complexes, and townhouses—can qualify for the LIHTC.
- Projects must commit to renting units to tenants with incomes averaging below the area’s median, and maintain this standard for at least 15 years.
What is the Low-Income Housing Tax Credit?
The LIHTC stimulates the development of affordable housing for low and middle-income families through substantial tax credits.
Two main categories of federal tax credits exist for developers:
- 9% credit: Available when the project has no other government subsidies.
- 4% credit: Can be combined with other tax credits and subsidies.
These credits span over a ten-year period, potentially covering a significant portion of a project’s taxable expenses.
Tax credits are allocated to each state by the federal government, which then determines which developers receive these credits. Due to high demand, not all applicants receive permits to utilize these credits.
3.44 million
This is the number of affordable housing units created in the U.S. from 1987 to 2021, thanks to the LIHTC, as per the latest HUD data.
How to Qualify for the Low-Income Housing Tax Credit
Properties eligible for the LIHTC include single-family homes, multiplexes, apartment buildings, and townhouses.
Developers, property owners, or investors must meet specific criteria based on tenant income levels and rental pricing. A project must fulfill one of the following three income tests:
- At least 20% of rental units are occupied by tenants with incomes not exceeding 50% of the local median income.
- At least 40% of rental units are occupied by tenants earning less than 60% of the area’s median income.
- At least 40% of units are leased to tenants whose income does not exceed 60% of the local median, and no units are let to tenants earning over 80% of the median income.
Compliance with these conditions must be sustained for at least 15 years. Failure to comply may result in a reclamation of the tax credit’s value.
A frequently cited critique is that properties in high-demand areas often become unaffordable for low-income families after the 15-year compliance period ends.
Support for People Seeking Low-Income Housing
Low-income housing projects rent units to tenants who meet specific income criteria and may receive reduced rents or housing vouchers to assist with payments.
Such housing can either be managed by housing authorities or private landlords who partake in government-supported rental schemes. Additional support comes from HUD, which offers housing subsidies based on income qualifications. Eligibility typically requires an income below 50% of the regional median income.
While both single renters and families can qualify for HUD housing subsidies, availability may depend on the appropriate size and type of units.
Low-income housing should not be confused with “affordable housing”, reserved for families spending over 30% of their income on housing costs.
The Bottom Line
The Low-Income Housing Tax Credit is designed to promote affordable housing development aimed at low-income individuals and families. These tax credits provide significant financial incentives for developers, encouraging them to cater to this under-served market. Potential low-income tenants must find properties qualified for the tax credit and meet specific income qualifications to benefit from these projects.
Related Terms: affordable housing, housing subsidies, tax-credit property, housing vouchers.
References
- Federal Register. “Section 42, Low-Income Housing Credit Average Income Test Regulations.”
- New York State Homes and Community Renewal. “Low-Income Housing Tax Credit Program”.
- National Housing Conference. “How the 9 Percent Tax Credit Program Works”.
- HUD Office of Policy Development and Research. “Low-Income Housing Tax Credit”.
- Congressional Research Service. “An Introduction to the Low-Income Housing Tax Credit”,
- Congressional Research Service. “An Introduction to the Low-Income Housing Tax Credit”, Page 5.
- Congressional Research Service. “An Introduction to the Low-Income Housing Tax Credit”.
