About The Low Income Housing
Tax Credit Program
The Low Income Housing Tax Credit (LIHTC or Tax Credit) program was created by the Tax
Reform Act of 1986 as an alternate method of funding housing for low- and moderate-income
households, and has been in operation since 1987. Until 2000, each state
received a tax credit of
$1.25 per person that it can allocate towards funding housing that meets program
guidelines (currently, legislation is pending to increase this per capita allocation).
This per capital allocation was raised to $1.50 in 2001, to $1.75 in 2002, and adjusted for inflation beginning in 2003. These tax credits are then used to leverage private capital into new construction
or acquisition and rehabilitation of affordable housing.
The tax credits are determined by the development costs, and are used by the owner.
However, often, because of IRS regulations and program restrictions, the owner of
the property will not be able to use all of the tax credits, and therefore, many LIHTC
properties are owned by limited partnership groups that are put together by syndicators.
In this manner, a variety of companies and private investors participate within the
LIHTC program, investing in housing development and receiving credit against their federal
tax liability in return.
Tax Credits must be used for new construction, rehabilitation, or acquisition and
rehabilitation. and projects must also meet the following requirements:
- 20 percent or more of the residential units in the project are both rent restricted and
occupied by individuals whose income is 50 percent or less of area median gross income or
40 percent or more of the residential units in the project are both rent restricted and
occupied by individuals whose income is 60 percent or less of area median gross income.
- When the LIHTC program began in 1987, properties receiving tax credits
were required to stay eligible for 15 years. This eligibility time period
has since been increased to 30 years.
These are minimums. Because of the way states award credits, it is in the interest of
developers to exceed these minimums, as most states look more favorably on projects
serving a higher percentage of income-eligible households.
Determining the amount of tax credit
Qualified Basis
Most states determine the amount of tax credit an individual project receives based on
its qualified basis. First, total project cost is calculated. Second, eligible
basis is determined by subtracting non-depreciable costs, such as land, permanent
financing costs, rent reserves and marketing costs. The project developer may also
voluntarily reduce the requested eligible basis in order to gain a competitive advantage.
If the development is located in a HUD designated high cost area (HCA), the eligible basis
receives a 130% HCA adjustment. These areas include both Qualified
Census Tracts (QCTs) and Difficult Development Areas (DDAs)
Finally, to determine the qualified basis, the eligible basis is multiplied by the
applicable fraction, which is the smaller of, (1) the percentage of low income units to
total units, or, (2) the percentage of square footage of the low income units to the
square footage of the total units, to arrive at the qualified basis.
The qualified basis is multiplied by the federal tax credit rate, published monthly by
the IRS, to determine the maximum allowable tax credit allocation. For projects that are
new construction or rehabilitation, which are not financed with a federal subsidy, the
rate is approximately 9%. For projects involving a federal subsidy (including projects
financed more than 50% with tax exempt bonds), the rate is approximately 4%. The 9% and 4%
rates are used to determine a project's initial tax credit reservation. A project's final
(placed-in-service) tax credit allocation is based on actual project sources and uses of
funds, the financing shortfall and the actual applicable federal rate. The rate applicable
to a project is the rate published for the month each building is placed in service or in
an earlier month elected by the sponsor. The allocation cannot exceed the initial
reservation amount and may be reduced if an analysis determines that the maximum allowable
amount would generate excess equity proceeds to the project.
Other Methods
Some states supplement the qualified basis method with other methodologies.
Texas, for example, will make an alternate calculation based on the gap between equity and
funding in addition to the qualified basis method, and a third alternative calculation can
be submitted by the applicant. The state will then determine the actual tax credit
by choosing the lowest amount generated by these three methods.
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