Everything You Need to Know About the LIHTC Program

What Is the Low-Income Housing Tax Credit?  

LIHTC is a federal tax credit that encourages the development, rehabilitation, and acquisition of rental homes developed for low-income tenants. Created in the Tax Reform Act of 1986, the LIHTC program uses private sector investment to help meet the need for decent, safe, and sanitary housing for those who cannot afford it today.

 

Local and state organizations receive $9 billion in tax credits annually, which help reduce the federal tax dollar-for-dollar. The credit these organizations receive depends on the number of low-income housing units developed under the eligibility criteria. LIHTC developers should maintain affordable housing for at least fifteen years. 

 

It uses private sector investments to help meet the need for decent, safe, and sanitary housing for those who cannot afford it.  

 

This period is denoted for compliance purposes. Rent is restricted according to a fraction of the Area Median Income (AMI), thus limiting it for individuals with low economic status.  

 

Check out our comprehensive blog that will simplify the LIHTC ecosystem and how it works.  

 

Overall, State and federal agencies recognize its significance as a key pillar in affordable housing policy and will maintain support for the LIHTC program. Ultimately, the LIHTC program has created or refurnished millions of low-cost homes and remains an essential tool for combating the U.S. housing crisis.  

 

The U.S. Department of Housing and Urban Development (HUD) reported that 3.65 million LIHTC units were put into service between 1987 and 2022. The HUD database contains data on the total number of units by property, their addresses, bedroom count by unit, year of credit allocation, the type of property, and the type of credit allocated to each property. 

  

Bonus Tip: When the shortage of low-cost housing in America is being debated, the LIHTC and affordable home programs are always mixed up because of the identification and definition. 

 

Renting houses from the affordable housing program is cheap and guaranteed as long as you are a tenant whose rent consumes 30% or more of your income.  

 

On the other hand, the LIHTC focuses on making low-cost rental units available for tenants with below-mean area incomes, according to AMI.   

  

History of LIHTC  

The low-income housing tax credit was created in 1986 by the Tax Reform Act so that private investors could be encouraged to invest in affordable rental housing.  

 

Below are some major dates in the history of the LIHTC revolution – 

 

• 1986: When Congress passed the Tax Reform Act in 1986, they established the Low Income Housing Tax Credit (LIHTC) program. This is because investments in rental housing had experienced prolonged depreciation durations and had low passive investment loss relief. 

• 1993: In 1993, the Omnibus Budget Reconciliation Act permanently authorized the LIHTC program since its a very effective way of promoting the growth and production of affordable housing opportunities. Currently, 25% of all new multifamily residential buildings are developed under the LIHTC development. 

• 2007-08: At a time of subprime mortgage crisis and subsequent recession, significant gaps in funding were encountered after LIHTC applications went down and large investors like Fannie Mae and Freddie Mac backed out of the LIHTC program. 

• 2009: During the financial crisis, the American Recovery and Reinvestment Act (ARRA) founded two programs for LIHTC projects that are the Tax Credit Assistance Program plus the Tax Credit Exchange Program. 

• 2017: The cut in corporate taxes by the Tax Cuts and Jobs Act (TCJA) raised concerns on reduced demand for LIHTC. Despite this, it continued to adjust itself. 

• 2018: The Consolidated Appropriations Act increased the tax credit quantum until 2021 by 12.5%, additionally introducing fresh affordability standards that are supposed to ensure affordable housing in perpetuity.  

  

Types of LIHTC Credits  

The Low-Income Housing Tax Credit (LIHTC) program has two primary types of credits, the 4 percent and 9 percent credits, that have different purposes depending on the project requirements and parameters.  

 

4 Percent Credit

 

• Non-competitive allocation of funds is often done with tax-exempt bonds or other government subsidies.  

• It is used for buying, repairing, or transforming already existing infrastructures. 

• A sum equivalent to 30% of the project’s qualified value is treated as a subsidy.  

 

9 Percent Credit  

 

• Distributed through a competitive process managed by state housing finance agencies.  

• Reserved for new construction projects without additional federal subsidies.  

• Provides a 70 percent subsidy on the project’s qualified basis.    

 

For more information on the difference between 4% and 9% LIHTC credit, refer to our blog post, which analyzes the subject in terms of specific utilization in affordable housing projects.   

How to Qualify for the Low-Income Housing Tax Credit?  

These are homeownership units, including single-family, duplex, apartment complexes, and townhouses that meet the LIHTC criteria. 

 

Property owners, investors, developers, and other stakeholders must meet certain criteria regarding the income level of tenants and the number of low-rated housing units offered.

 

Here are the key criteria:  

 

Income Tests  

 

A project must meet one of the following three income tests:  

 

1. 20 to 50 Test: Renters must lease out at least 20% of the units whose family earnings are over 50% of the AMI while the rest remain unoccupied.  
2. 40 to 60 Test: Out of all the renters that occupy the apartments, none should pay for more than 40% of the rent whose income is above 60% of their AMI.  
3. 40-60 with No Over-80: Landlords are required to offer 40% of their rental space to tenants who do not make more than 60% of their Ami; at least 40% of the housing should then be allocated to them without any single tenant going over 80% in terms of earnings based on official statistics.  

 

Each housing project tllocated with LIHTC at na ascent stage should adhere to one of these income conditions within 15 years, lest the tax credit we reversed as an act of not complying with such conditions. 

 

For more information on how LIHTC works, including rules that must be adhered to and who qualifies for the program, you can refer to our blog, An Overview of Eligibility for Tax Credit Financing and How to Apply for LIHTC. This blog provides comprehensive insights into the requirements and steps involved in qualifying for the LIHTC program.  

Benefits of LIHTC  

Private investments have made possible the development of affordable housing in the country via LIHTC, which has seen millions of modest homes built. Furthermore, such initiatives have allowed local businesses to establish themselves, resulting in more employment. 

 

Besides, distressed neighborhoods experience revitalization courtesy of LIHTC projects, which lead to improved infrastructure and better community well-being.  

 

You can explore our blog on the benefits of LIHTC and learn more about its impact on communities.   

Challenges of LIHTC  

The LIHTC program has been successful. But there are some obstacles it faces for it to work properly.  

 

For example, the developers may find it difficult because some form of compliance is required, which is very complex because of the troublesome documentation process.  

 

Moreover, some people wonder if LIHTC houses will remain affordable over time since some could end up being expensive, considering that they are meant for low-income individuals and are required to remain so for at least 15 years in order to comply. 

 

Please read our blog for a comprehensive understanding of the challenges and criticisms of the LIHTC program.  

 

Key Takeaways   

1. The Low-Income Housing Tax Credit (LIHTC) programs promote the construction of low-cost housing facilities by offering a 10-year tax rebate.  
2. Developers cannot transfer or ask for refund of the tax credits given to them.  
3. Furthermore, the LIHTC credits can be used for both the construction of new LIHTC homes as well as the renovation of present buildings, among other things.    
4. Since LIHTC was established in 1986, more than 3 million housing units have been financed, making it the largest source of funding for affordable housing in the United States.   
5. Developers get tax credits to reduce their cost for LIHTC units if they agree to set aside some apartments for low-income families at reduced rent.   
6. The LIHTC credits can be used in almost any kind of properties such as single-family homes, multi-family dwellings, complexes or apartments.    
7. The LIHTC units are allocated to the tenants for 15 years.    
8. The yearly cost of the LIHTC tax credit is estimated to be $13.5 billion (about $42 per person in the U.S.), which the U.S. government pays.   
9. Several studies, including Michael Eriksen’s 2009 paper, ‘The Market Price of Low-Income Housing Tax Credits,’ have found that housing units produced by LIHTC developers are approximately 20% more expensive than average industry estimates.      
10. The LIHTC faces fraud and criticism in information sharing, record keeping, and cost assessment. It is an inefficient and ineffective method of providing affordable housing to tenants who need it.     

The Bottom Line   

For millions of families and individuals falling into the low-income bracket and looking for affordable houses to live and thrive, the LIHTC initiatives are the primary source of solving the housing crisis in the United States.   

 

It has grown to be the country’s largest affordable housing program, working to encourage the production and preservation of quality rental housing for low-income tenants by providing substantial tax credits to developers who adapt, construct, or rehabilitate properties for occupancy by eligible tenants with low income.   

 

Technology advancements are simplifying the management of LIHTC properties. Software applications such as Fusion are making huge impacts in the industry by helping developers and property managers streamline compliance and administrative processes. In addition to these reporting and management tasks, such LIHTC software solutions also make it convenient for stakeholders to comply with LIHTC rules by easing the process of income certification, document management, and property operations.