Low-Income Housing Credit
To encourage investment in low-income housing, Congress, through the Tax Reform Act of 1986, created the Low-Income Housing Tax Credit (LIHTC, pronounced lie-tech). This incentivizes investors to build low-income housing through a dollar-for-dollar tax credit. In fact, the Department of Housing and Urban Development, or HUD, considers LIHTC the most crucial resource for ensuring America has enough affordable housing. In exchange for a capital contribution to a low-income housing project, the government provides those investors with tax credits. This means that each dollar invested in LIHTC subtracts from the amount otherwise owed to the IRS. Owners, who are either individuals or businesses, of residential rental property used for low-income housing may claim the credit over a ten-year period.
LIHTC is a government program and uses federal tax money. However, each state's housing authority administers the program for the purchasing, rehabilitating, and building of property for affordable housing.
To qualify, a low-income housing structure must be subject to a restrictive covenant, which is a type of agreement placing certain restrictions on the property, between the owner and the state allocating agency. After an initial fifteen-year compliance period, the rules require that the building be subject to an additional fifteen-year period of continued low-income use. During that time, residents must earn less than a state-mandated income and pay reduced rent.
In addition to the income and rent restrictions, the restrictive covenant allows qualified tenants to enforce the covenant and prohibits owners from certain evictions or rent increases for three years after the end of the thirty-year extended use period. The restrictive covenant is binding on all future buyers of the property.
Area Median Income, or AMI, plays a significant role in LIHTC. HUD uses various factors to determine AMI for different areas. For instance, the AMI in New York City for a family of four in 2021 is $107,400. This number, which is a median income number, is then used to calculate low income.
Regarding LIHTC, an owner may choose one of two occupancy restrictions for a given property:
- At least 20% of units occupied by households whose income is at or below 50% of AMI; or
- At least 40% of units occupied by households whose income is at or below 60% of AMI.
Qualified low-income buildings
The credit is available to units that are "qualified low-income housing units." A qualified low-income unit must meet the following criteria:
- Units are leased to an income-eligible tenant;
- Units are rent-restricted;
- Units are suitable for occupancy under state and local health or building rules and regulations;
- Units are used on a non-transient basis, i.e., subject to a lease with a minimum term of six months;
- Units are leased to a non-student household;
- Units are available to the general public.
Moreover, developers must initially allocate those units for low-income housing. Building a housing unit and later renting it to a low-income family does not qualify for LIHTC.
Q&A: What is an example of a tax credit?
A tax credit is a way to lower your tax bill. When you qualify for one, the amount is taken directly off your owed amount. While some are non-refundable, many tax credits are refundable, meaning they can also increase your tax refund.
There are many tax credits to look into to see if you're eligible. The earned income credit is for low-income taxpayers who work. For anyone who works and pays for care for a child or other dependent, you could be eligible for the Child and Dependent Care Credit. The Child Tax Credit lets you claim a credit for every child you claim as a dependent.