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Overview of the Low Income Housing Tax Credit Program (LIHTC)
The Low Income Housing Tax Credit (LIHTC) program is currently the country’s most extensive affordable housing program. The program was added to Section 42 of the Internal Revenue Code in 1986 in order to provide private owners with an incentive to create and maintain affordable housing.
The LIHTC program works through a subsidy mechanism. The Internal Revenue Service (IRS) allocates funds on a per capita basis to each state. Currently, each state receives $2.00 per capita. However, the Housing and Economic Recovery Act of 2008 temporarily increased the maximum allocation per person to $2.20 through 2009.
Each state has a housing finance or other agency (HFA) that assumes responsibility for allocating tax credits to developers. The process by which the HFA allocates the credits is competitive and uses criteria enumerated in the state’s Qualified Allocation Plan.
Investors buy income tax credits in qualified properties that have received state allocation, creating cash equity for owners that reduces project development debt burden. In exchange, the owner agrees to rent a specific number of units to qualified tenants at specified rents, usually below-market. Two levels of tax credits are available: one at 9% of depreciable basis, competitively allocated; the other, at 4% of depreciable basis, comes with state bond financing, which is capped and allocated by a state agency, which may or may not be very competitive.
During the initial 15-year compliance period, in which tax credits are subject to recapture, a developer (a corporation, nonprofit, or individual) will usually enter into a limited partnership with investors (generally a corporation or individual) so that it can sell the tax credits to the investors in exchange for cash. The investors, usually the limited partners, benefit from the tax credits while the developer, usually the general partner, benefits from the cash infusion it receives from selling the credits to the investors. The investors generally sell to the general partner at the end of the initial 15-year compliance period. HUD provides a brief overview of LIHTC ownership.
Term of Restrictions
When the LIHTC program was initially created, it only required a 15-year compliance period. Therefore, properties developed between 1986 and 1989 only have 15-year compliance periods. Post-1989 developments have at least 30-year restrictions as required by the Revenue Reconciliation Act. However, the statute allows for owners to opt out by requesting that the state HFA find a “qualified contract” purchaser to buy the property during the fourteenth year of the initial 15-year compliance period. If no purchaser is found, the owner may exit the LIHTC program. If a purchaser is found, or if the owner will not sell the property, the use restrictions extend to the full 30 years. For more information on the Qualified Contract process, visit the LIHTC Preservation page .
Some states have required even longer compliance periods. Generally, because tax credits are competitively allocated, states may impose more restrictive requirements than the Code minimum, e.g., greater percentages of restricted units, deeper income targeting and rent levels, or longer use restrictions.
Occupancy and Rent Restrictions
An owner may choose one of two occupancy restrictions:
• At least 20% of units occupied by households whose income is at or below 50% of AMI.
• At least 40% of units occupied by households whose income is at or below 60% of AMI.
Furthermore, an owner may elect to commit to a deeper restriction of 15% of the units at 40% of AMI.
The occupancy restricted units must have “affordable” flat rents set at 30% of income of tenants at the top of the selected AMI category, with an assumed family size of 1.5 persons per bedroom.
Section 8 Voucher Holders
LIHTC owners may not refuse to rent to Voucher holders because of their status, presumably at least so long as the rents are determined “reasonable” by the PHA. 26 U.S.C.A. § 42(h)(6)(B)(iv) and 26 C.F.R. § 1.42-5(c)(1)(xi).
Sources of Regulation
Section 42 of the Internal Revenue Code
Treasury regulations at 26 C.F.R. §1.42
State QAP and regulations
State Regulatory Agreement with the owner