Tax Credits for Low-income Housing

Tax Credits for Low-income Housing
One of the most important affordable housing programs initiated by the federal government of the United States is the Low-Income Housing Tax Credit (LIHTC).
The LIHTC was created as a part of the 1986 tax reform act and was used to curb the shortage of affordable housing for low-income earners. The LIHTC is now a very necessary tool in the creation of almost if not all the affordable housing programs available in the country for low-income families.
As a part of the incentive offered by the LIHTC, low-income housing projects and developers are provided credits to ensure there is more affordable housing made available to low-income families in various communities.

These allocations of tax credits are conducted on an annual basis to allow for the rehabilitation, acquisition, and construction of rental properties targeted at low-income families.

These tax credits are made available and allocated to the different states by the federal government and then each state in turn allocates the credits to different developers and investors who meet the laid out criteria for providing low-income housing projects.

How To Qualify For The Low-income Housing Tax Credit

There are always a ton of properties and developers competing to be eligible for the low-income housing tax credit (LIHTC), but the funds are usually limited and cannot be given to all projects, hence the need to go through some form of application to be eligible. Below are listed some of the eligibility criteria required for a housing project to be qualified for the LIHTC.

  • The rental units must be available to rent for tenants who earn about 50% of the median income based on the area.
  • The housing project is for large families with low monthly housing costs and low-income households.
  • Housing projects that are located in the rural areas of the country.
  • Projects that need a tax credit for low-income housing project feasibility.
  • Housing projects are made available for a specific population, like people with special needs or the homeless.
  • Rental housing rehabilitation for existing properties that are rent restricted to low-income households.
  • Projects must be made available to low-income tenants in a particular area for a minimum of a 15-year period.

Understanding Low-income Housing Tax Credits of 4% and 9% That Are Available

There are two distinct types of tax credit allocated by the federal government for low-income housing projects and these are referred to as the 4 percent credit and 9 percent credit.

The 9% credit is used for housing projects that do not make use of other government housing subsidies. The 9% credit is awarded by the state through the state’s Housing Finance Authority (HFA) and the Qualified Allocation Plan (QAP) which states the requirements necessary for project application. Each state in the country has a unique eligibility criteria with some been, the number of available units, project cost, quality of housing etc.

Housing projects applying for the 9% tax credit can only do so through the Multifamily Finance 9% RFP process, which is usually very competitive as it is conducted only twice in a year. To access the funds from the federal or state agencies, applicants must submit a single application and follow laid out procedures.

The 4% tax credit is awarded and used for housing projects that can be put to use with other government housing subsidies. The 4% credit is allocated by the federal government and does not impact the HFA state annual allocation. This type of tax credit can be funded through government subsidies for affordable housing acquisition and rehabilitation. Applications for the 4% tax credit are conducted throughout the year and must be applied through the state’s HRC, which allocates the funds.

It is very important to note that applicants can only be awarded one type of credit for a particular housing property at a time, whether it is the 9% or 4% credit. If the project applicant has multiple housing projects, he or she may apply differently and get different credits per project.

Overall, the 9% and 4% credits are applied for about ten years on a property and cover almost all the tax expenses for the housing property. Also, all housing projects willing to participate in this type of housing program must be ready to continue making available housing for low-income earners for a duration of 15 years, without which the tax credits allocated to the housing can be revoked.

Conclusion

The Low-income housing tax credit (LIHTC) is a federal government program that encourages private property owners to create affordable housing for low-income families and individuals to curb the problem of difficult housing placement in the country.

The Department of Housing and Urban Development (HUD) and state Housing Finance Authorities (HFA) are in charge of establishing the criteria for projects to qualify as private and local investors.It is worthy of note that the tax credits are less available than the number of eligible projects, hence the competitiveness.

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