The Low-Income Housing Tax Credit (LIHTC) program is a federal government initiative which gives designated agencies authority over a roughly $8 billion budget for the purpose of providing tax credits for the acquisition, rehabilitation, or construction of rental housing for lower-income households. Enacted as a part of the Tax Reform Act of 1986, the LIHTC program is meant to incentivize developers to create low-income housing by offering a 10-year credit on federal income tax. Without the incentive, affordable rental housing projects would not be as appealing to multifamily investors, since they otherwise might not generate sufficient profit to justify investment.

LIHTCs help fund the new construction and rehabilitation of a variety of different property types, including traditional apartments, single-family homes, and two- to four-unit multifamily properties (think duplexes or triplexes). In addition, LIHTCs can fund the conversion of structures like schools, warehouses, and motels into multifamily properties. Properties using these credits must generally cap rents for some or all of the units at a certain percentage of a location’s Area Median Income, or AMI.

The Low-Income Housing Tax Credit Program (LIHTC) was created in 1986 as part of the Tax Reform Act. The program functions by granting state and territorial governments authority over a predetermined budget. State housing agencies can then award tax credits to private developers through a competitive process. Developers awarded low-income housing tax credits typically sell credits to private investors in order to obtain funding for a project.

Though technically a federal program, the LIHTC program is executed by individual state Housing Finance Authorities (HFAs), which are responsible for approving LIHTCs to investors and developers on a project-by-project basis. Each state has a Qualified Allocation Plan (QAP), created to detail specific eligibility requirements for LIHTC projects, which are typically stricter than at the federal level.

LIHTCs don’t provide a tax deduction, which would reduce a borrower’s taxable income. Instead, the credit provides a tax discount of a specific dollar amount that can be applied to the investor or developer’s tax bill. Once the housing project is made available to tenants, investors are then able to claim the LIHTC over a 10-year period.

The federal government allocates a specific amount of credits to each state, based on the state’s population and a pre-determined multiplier. As both of these numbers can change, the amount of credits a state can get varies significantly. In 2018, the state multiplier was 2.40, so, for example, Florida, with a population of 20.98 million, would have a maximum of $50,352,000 in tax credits available for that year.

As of 2017, the minimum allocation for states was set at $2.69 million, to ensure that smaller states, like Wyoming and Alaska, would still effectively be able to make use of the program.

The Low-Income Housing Tax Credit (LIHTC) Program is a federal government tax credit that helps facilitate the construction and rehabilitation of 3.6 million affordable housing units throughout the U.S. Unlike tax deductions, which create a reduction in taxable income, tax credits provide a dollar-for-dollar reduction in an investor’s tax liability, which can be incredibly attractive.

The LIHTC program funds the new construction and rehabilitation of a variety of different property types, including traditional apartments, single-family homes, and two- to four-unit multifamily properties. In addition, LIHTCs can fund the conversion of structures like schools, warehouses, and motels into multifamily properties. Properties using these credits must generally cap rents for some or all of the units at a certain percentage of a location’s area median income, or AMI.

The benefits of the LIHTC program include:

• Tax credits provide a dollar-for-dollar reduction in an investor’s tax liability.
• Funds the new construction and rehabilitation of a variety of different property types.
• Can fund the conversion of structures like schools, warehouses, and motels into multifamily properties.
• Properties using these credits must generally cap rents for some or all of the units at a certain percentage of a location’s area median income, or AMI.

In addition, investors or developers may also be in a strong position to utilize additional credits if a property or development is located within an Opportunity Zone.

In order to qualify for the Low-Income Housing Tax Credit (LIHTC) program, a building must reserve a certain number of units for low-income residents. In most cases, they must either follow one of two “rules”: the “20/50 rule” or the “40/60 rule”. The 20/50 rule requires that at least 20% of a property’s units be rented to tenants who earn 50% or less of the area median income (AMI), while the 40/60 rule requires that at least 40% of a property’s units be rented to tenants who earn 60% or less of the AMI. Additionally, a gross rent test must also be passed. This test requires that rents for the property do not exceed 30% of either 50% or 60% of AMI (the exact percentage depends on the number of rental units set aside for the credit). LIHTC properties are required to pass these income and rent tests for a period of no less than 15 years — or risk having the tax credits recaptured by the local housing authority.

In order to apply for the Low-Income Housing Tax Credit Program, you must contact your state's Housing Finance Authority (HFA). Each state has its own Qualified Allocation Plan (QAP) which outlines the eligibility requirements for LIHTC projects. You can find contact information for your state's HFA on the NOVO Resources page.

The Low-Income Housing Tax Credit Program can be a great way to fund the construction and rehabilitation of affordable housing units, but there are some potential risks associated with it. The competition for the LIHTC program is fierce, as each state only receives a limited amount of LIHTC funds each year, based on population and a specific multiplier. In addition, the LIHTC generally has a 15-year compliance period, during which the property must remain affordable and before which the property cannot be sold. This, however, is only a minimum, and many states have more restrictive rules in place. Investors should also be aware that the LIHTC program is subject to changes in federal tax laws, which could affect the amount of credits available and the terms of the credits. Finally, LIHTCs are subject to recapture, which means that if the property is sold or refinanced before the end of the compliance period, the investor may be required to pay back a portion of the credits received.

For more information, please see the following sources:

• Federation of American Scientists analysis
• NAHRO housing advocacy organization
• What is Area Median Income (AMI)