Low-Income Housing Tax Credit (LIHTC)
The Low-Income Housing Tax Credit (LIHTC) program is the most important resource for creating affordable housing in the United States today. The Low-Income Housing Tax Credit (LIHTC) is a tax incentive for housing developers to construct, purchase, or renovate housing for low-income individuals and families. .
To a developer, affordable housing means lower rents than a market-rate project, lower net operating income, and thus lower returns on their investment. Accordingly, without any outside incentive a developer has little motivation to build affordable housing. Unfortunately, the need for affordable housing is significant. Recognizing the need for affordable housing, and the fact that few developers would pursue these projects when market-rate developments offer a higher return, the federal government looked for ways to make affordable housing projects financially attractive to developers.
Under the program a developer receives federal income tax credits over a year period in exchange for i acquiring, rehabbing or newly constructing rental housing for low-income households, and then ii operating the project under LIHTC guidelines for a certain compliance period. Developers sell the right to use these credits to investors who want to reduce their federal taxes.
This formula has been successful in attracting how to make a big pennis dollars hosuing create affordable housing. According to the U. Sometimes a developer has to build a project imcome scratch. Sometimes they find a suitable existing building, but need to acquire ard modify it to accommodate rental units.
And sometimes a developer owns an existing building, but needs to rehabilitate it to offer affordable units. The LIHTC can be used for all three situations: new construction, acquisition and rehabilitation, and rehabilitation of a property already owned by a developer. How to contest a property tax assessment should be noted that LIHTC hohsing also be used to preserve projects funded or supported with other affordable housing programs, including, for example Federal Housing Act how does a toupee work U.
Although the credit was authorized by federal law, and reduces federal tax liability, the federal government has put the administration of the program in the hands of the states.
For example, in Coloradothe state will generally grant credits to new how to get quicktime to play avi files projects before awarding them to acquisition and rehab projects.
By allowing states to create their own priorities, not only can a state address its unique housing needs, but it also encourages developers to commit to more than the minimum federal requirements. For example, if a state prioritizes new construction projects over rehabs, a rehab developer may still be able to move up the priority ladder if it offers other desirable commitments like lower rents, a higher percentage of affordable units, or that the low-income units will be available for a longer period.
Because a state is allocated a limited number of credits, and the amount of credits sought by developers almost always exceeds the allocated amount, the award of credits is highly competitive. How does a developer make their project more attractive to a state, and thus more likely to receive credits? Because lw change, and the percentage multiplier changes, the allocation amounts change each year. What was the impact on a single state?
Well, between and the population of California grew from Accordingly, the credits allocated to this would increase as follows:. Additionally, as a developer is preparing its initial proposal, it typically engages in negotiations with investors to purchase the credits if the project is approved.
As mentioned above, investors make a capital contribution to a LIHTC project in exchange for the right to use the credits to offset their tax liability. In order to do so, the investor must join in the ownership of the project, typically through the formation of a limited liability company LLC or a partnership with how to wash hiking boots developer.
The investor purchases a share in the partnership, typically approaching total ownership e. The developer also wants to grant this near-total ownership because the more credits the investor can claim, the greater the contribution the investor will make. Accordingly, their capital contribution is less than the total amount of credits. Additionally, an investor will require a discount to reflect the time value of money.
Often, in order to maximize its profit they will make multiple contributions over time as certain project milestones are met. As with the discount rate, the number and timing of payments are terms negotiated between the developer and investor. Lastly, while many investors are individual institutions e.
Syndicators combine multiple projects into a single fund, and then offer shares in the fund to individual investors. The set-aside chosen dictates i the percentage of units and square footage the developer commits to renting to low-income tenants, and ii the level of income of those tenants.
It should be noted that these percentages are federally required minimums, and states are free to require higher set-asides. Because these percentages are used in the calculation of the tax credits granted to developers, many choose to increase the percentage of low-income units to maximize credits. And the greater the amount of credits, the greater the investor contribution, and the more profitable the project.
Once the state and developer agree on a set-aside commitment, the percentages are memorialized in the project agreement. Whichever set-aside option is chosen, the developer must meet it within the first year of the year credit period, what does pqrst stand for in first aid maintain it for the entire compliance period, or else lose its credit eligibility.
Many LIHTC projects include a mixture of rent-restricted units for low-income households and market-rate rental units. Under this rule the developer must rent the next available unit of comparable size or smaller to a taz low-income qualified tenant at the below-market rate. This is done because the program wants to encourage low-income tenants to increase their incomes which may not occur if they knew a higher income could cost them their below-market rentwhile at the same ar still making the same number of units available to low-income households.
If the property falls out of compliance, investors can be subject to the recapture what is john peter zenger loss of credits, including credits that were claimed while the project was still in compliance. For example, if non-compliance occurred in Year 14, credits in Year 1 may be subject to recapture.
During this period the project must continue to provide affordable housing, but the definitions of affordable housing and compliance may differ from the definitions required during the initial year period. Such definitions and other terms are negotiated and included in an EUP agreement between the state and developer. To do so, the developer asks its HFA to find a buyer that will continue to operate the project as an affordable housing project through the full compliance and extended use periods.
If such a buyer is found, the developer can sell them the property. If a buyer is found, but the developer refuses to sell to them, then the developer must continue to meet its LIHTC obligations through the full period. However, as a condition to awarding tax credits, many states require developers to waive this right to request a sale.
How much a developer receives in credits involves cedits consideration of housong the investment the developer made in the project, 2 the percentage of low-income units it creates, 3 type of project i.
Additionally, certain soft costs related to the project, such as architectural, engineering, legal and reasonable developer fees, may be included in the eligible basis. Notably, because the value of land is not depreciable, land acquisition costs cannot included in the eligible basis. What is its eligible basis? The next step in determining the projected amount of annual tax credits is multiplying the qualified basis by the applicable tax credit percentage.
The applicable percentage depends on the t ype of project and whether it is receiving other federal subsidies. Good question. The developer makes the above calculation based on its expected costs and percentage of low-income units, and then includes its projected credit amount in its application to the HFA.
The actual credits awarded, however, are based upon the actually certified eligible costs and actual low-income unit percentages. When an application is approved by the state, it reserves the amount creddits projected credits for the developer. This amount then reduces the amount of credits it can award to other developers. The certificate typically includes such items creeits the qualified costs actually incurred, construction and design agreements, and the percentage of units reserved for low-income qualified tenants.
Under the agreement between the developer and investor, the credits are then claimed by the inventor on its federal tax return, offsetting its taxable income. The LIHTC program has successfully attracted private equity to affordable housing projects, and increased the number of units available to low-income households. Accordingly, if you have any specific LIHTC issues, please talk with a lawyer well versed in the intricacies of the program.
There are rules about income increasing and tenants being eligible for the Next Available Unit. I have not been able to find anything definitive on the tenants that are in affordable or market-rate units, where income has gone down or one of the tenants has left the unit. Specifically, in a family situation where there has been domestic violence and the tenant left is a single mother with low income.
Is the landlord obligated to reduce the rent what are low income housing tax credits on the new income crwdits provide the next available low income unit? Surely they can not rcedits evict this tenant. That would seem to defeat the purpose of this entire program. Your email address will not be published. Save my name, email, and website in this crwdits for the next time I comment.
Do you have questions, comments, or feedback? Drop us a line and let us know. Get in touch. Skip to main content Skip to primary sidebar Skip to footer To a developer, affordable housing means lower rents than a market-rate project, lower net operating income, and thus lower returns on their investment. Accordingly, the credits allocated to this would increase as follows: Investors and Their Capital Contributions As mentioned above, investors housinf a capital contribution to a LIHTC project in exchange for the right to use imcome credits to offset their tax liability.
Calculation of Tax Credits How much a developer receives in credits involves arre consideration of 1 the investment the developer made in the project, 2 the percentage of low-income units it creates, 3 type of project i. And why not? Conclusion The LIHTC program has successfully attracted private equity to affordable housing projects, and increased the number of units available to low-income households.
Types of LIHTC Projects
Oct 09, · The Low-Income Housing Tax Credit is a tax credit for real estate developers and investors who make their properties available as affordable housing for low-income Americans. It’s paid for by the federal government and administered by the states, according to . The Low-Income Housing Tax Credit (LIHTC) program helps create affordable apartment communities with lower than market rate rents by offering tax incentives to the property owners. It does not offer tax credits to the tenant renting the unit. LIHTC properties may contain market rate units that are not financially assisted, in addition to reduced rent LIHTC units under a tiered rent structure.
It was created under the Tax Reform Act of TRA86 and gives incentives for the utilization of private equity in the development of affordable housing aimed at low-income Americans. The credits are also commonly called Section 42 credits in reference to the applicable section of the Internal Revenue Code. The tax credits are more attractive than tax deductions as the credits provide a dollar-for-dollar reduction in a taxpayer's federal income tax , whereas a tax deduction only provides a reduction in taxable income.
The "passive loss rules" and similar tax changes made by TRA86 greatly reduced the value of tax credits and deductions to individual taxpayers. The United States Tax Reform Act of TRA86 adversely affected many investment incentives for rental housing while leaving incentives for home ownership. Since low-income people are more likely to live in rental housing than in owner-occupied housing, this would have decreased the new supply of housing accessible to them.
Over the subsequent 20 years, it has become an extremely effective tool [ citation needed ] for developing affordable rental housing [ citation needed ]. The LIHTC program has helped meet a critical affordable housing shortage by stimulating the production or rehabilitation of nearly 2. Through development activity, the LIHTC creates and supports approximately 95, jobs annually - the majority of which are small business sector jobs [ citation needed ].
Development capital is raised by "syndicating" the credit to an investor or, more commonly, a group of investors. To take advantage of the LIHTC, a developer will typically propose a project to a state agency, seek and win a competitive allocation of tax credits, complete the project, certify its cost, and rent-up the project to low income tenants.
Simultaneously, an investor will be found that will make a "capital contribution" to the partnership or limited liability company that owns the project in exchange for being "allocated" the entity's LIHTCs over a ten-year period. The amount of the credit will be based on i the amount of credits awarded to the project in the competition, ii the actual cost of the project, iii the tax credit rate announced by the IRS, and iv the percentage of the project's units that are rented to low-income tenants.
Failure to comply with the applicable rules, or a sale of the project or an ownership interest before the end of at least a year period, can lead to recapture of credits previously taken, as well as the inability to take future credits.
These rules are described in greater detail below. The program's structure as part of the tax code ensures that private investors bear the financial burden if properties are not successful. This pay-for-performance accountability has driven private sector discipline to the LIHTC program, resulting in a foreclosure rate of less than 0.
The first step in the process is for a project owner to submit an application to a state authority, which will consider the application competitively.
The application will include estimates of the expected cost of the project and a commitment to comply with one of the following conditions, known as "set-asides":.
There are no limits on the rents that can be charged to tenants who are not low income but live in the same project. The program is administered at the state level by State housing finance agencies with each state getting a fixed allocation of credits based on its population.
The state housing agency has wide discretion in determining which projects to award credits, and applications are considered under the state's "Qualified Allocation Plan" QAP. The credits are usually awarded to projects in a few "allocation rounds" held each year, on a competitive basis.
Typically, the top ranked project will get credits, then the second, and so on until the credits are exhausted for the round. A portion of each state's credits must be "set aside" for projects sponsored by non-profit organizations, although non-profits more typically apply for credits under the "general" rules, without regard to the set-aside.
This allows each state to set its own priorities and address its specific housing goals. It also encourages developers to offer benefits that are better than the established minimums when competing against other projects e. Not all projects claim the low income credit based on this competitive process. Projects that are financed by tax-exempt bonds can also qualify for the credit. Certain types of tax-exempt bonds are also limited on a state-by-state basis, and the state agency responsible for bonds may be different, but the state agency generally applies similar rules as the agency responsible for the tax credit program.
The project owner must agree to comply with Section 42 and maintain an agreed percentage of low income units in a "Land Use Restriction Agreement" LURA which is recorded. Under the LURA, the project is required to meet the particular project's low income requirements for a year initial "compliance period" and a subsequent year "extended use period" or longer, if required by the local authority; the extended use rules were added in , and do not apply to projects developed in the first few years of the program.
The credits are subject to "recapture" if the project fails to comply with the requirements of Section 42 of the Tax Code during the year compliance period. Rules that required a taxpayer to post a "bond" if a recapture event occurred were repealed in The "eligible basis" of a project is the cost of acquiring an existing building if there is one but not the cost of the land , plus construction and other construction-related costs to complete the project. For example, the costs of obtaining permanent financing, or "syndicating" the credits to an investor are not included.
Adjustments must be made for federal grants as well. This is then multiplied by the percentage of the units that are "low income", in accordance with the conditions described above, to determine the project's "qualified basis" that actually qualifies for the credit. Rules that provided a lower credit rate for "below-market federal loans" were repealed in , applicable to buildings placed in service after July 30, Another rule that does not allow a credit for the acquisition cost of existing buildings, unless they were last placed in service more than ten years ago, no longer applies if the building was substantially financed pursuant to a large number of federal or state programs.
Regardless of the result of these computations, the credit cannot exceed the amount allocated by the state agency. The credits are not provided in a lump sum but instead are claimed in equal amounts over a year "credit period" many projects claim credits over 11 years, due to the rules governing how many credits can be claimed in the first year of the credit period.
A tax credit, or equity, syndicator connects private investors seeking a strong return on investments with developers seeking cash for a qualified LIHTC project. As mentioned above, the credit is used to generate private equity, often prior to, or during, the construction of the project. Developers typically "sell" the credits by entering into limited partnerships or limited liability companies with an investor, with The funds generated through the syndication vary from market to market and year-to-year.
Further, due to the fact that depreciation on the buildings owned by the partnership is also tax deductible, and that depreciation is allocated Indeed, when the credit alone was selling for 95 cents per dollar of credit, there were some cases where investors actually paid slightly more than a dollar for a dollars worth of tax credits plus other tax benefits.
In , as Congress re-evaluates "tax-expenditures", the fate of the LIHTC program is questionable due to the high "soft" costs and relatively low investor yield. An investor will typically stay in the partnership for at least the compliance period, because a reduction in its interest can also result in recapture of the credits. An investor wishing to exit the partnership before the end of the compliance period may post a surety bond to avoid credit recapture.
The following table summarizes the relationship between the developer and outside investors. States are also responsible for monitoring the ongoing development costs, quality and operation of approved projects, as well as the enforcement threat of notifying the IRS of "noncompliance" if the project deviates from the applicable requirements of the Code and the LURA, described above. Such a notice can lead to recapture of previously taken credits and inability to claim credits from the project in the future.
The IRS has published Form for the purpose of reporting possible problems with the project, and its Guide to the Form that details the IRS view on various issues related to noncompliance. Owners of LIHTC properties and their management agents must be able to prove the tenants living in the low income units meet the eligibility requirements of the LIHTC Program and remain eligible throughout their tenancy.
Also, each year the tenant remains in the low-income unit, a re-examination or recertification must be performed to ensure the tenant continues to remain LIHTC Program eligible.
Failure to correctly prove initial eligibility and re-examine continued eligibility is noncompliance and puts the LIHTC owner at risk of losing its credit claim. Thorough documentation of tenants' eligibility is required and records must be maintained for each qualified tenant. Records from the first year of participation in the LIHTC Program must be maintained for 21 years from the date the tax return claiming these credits was filed including all extensions, and subsequent years' records must be maintained for 6 years from the date the tax return claiming the applicable credits was filed including all extensions.
Owners must report on the compliance status of the LIHTC property at least annually to the State Allocation Agency from which it received its credit allocation. State Allocation Agencies must follow very specific requirements for monitoring, inspecting and reporting as laid out by the IRS.
Owners and their management agents are strongly encouraged and in some cases mandated by their State Allocation Agencies to become certified compliance professionals. Certifications requirements usually include an Education and Experience Requirement.
The Education Requirement is met by successfully passing an industry exam and accruing the applicable number of required course hours. The Experience Requirements vary among designations. All designations also contain a continuing education component to ensure certified professionals maintain their knowledge and keep abreast of the LIHTC Program changes.
The development of new tax credit properties and rehabilitation activities for older affordable housing properties froze completely. The American Recovery and Reinvestment Act of created two gap-financing programs to help tax credit properties, which were ready to begin construction, get additional financing. The State housing agencies were allowed to offer the assistance in either a grant or loan form to the properties. State housing agencies were required to use a grant to make sub-awards to finance the acquisition or construction of qualified low-income buildings, generally subject to the LIHTC requirements discussed including rent, income, and use restrictions on such buildings.
In the latter part of , the market stabilized as non-traditional investors began to back fill the investment gap. LIHTC advocates rallied around legislative proposals to ensure that investment remained stable in both the short-term and in the future. From Wikipedia, the free encyclopedia. This article is part of a series on Taxation in the United States Federal taxation. State and local taxation. Federal tax reform.
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