Low-Income Housing Tax Credits - Affordable Rental Housing
There is a great need for affordable housing in USA for low-income families. A research by the Center of Housing Studies states that there are about 11.6 million housing units available for low-income families. While the low-income renters in USA are about 18 million, that is a shortfall of 6.4 million affordable homes. Investors who are considering investing in this market have to know about the federal Low-Income Housing Tax Credits (LIHTC) program.
Low-Income Housing Tax Credits (LIHTC)
The Federal government initiated Low-Income Housing Tax Credits (LIHTC) program under the tax reform act of 1986. The aim of LIHTC is to develop affordable rental housing projects for low-income families in the USA. The LIHTC program allows tax credits (Section 42 credits) to investors who provide equity for the development of the program.
The federal tax credit under the LIHTC program can range from 30-70% of the cost incurred in development of the housing project. Over the last 28 years, LIHTC has financed the development of over 2.8 million rental homes for low-income people all over USA.
How Low-Income Housing Tax Credits (LIHTC) Works?
1. The Federal Government Issues Tax Credits to States
The US Treasury Department allows allocation of tax credits to the States, to fund rental housing project for low-income people. The state requires that the housing projects should remain affordable for at least 30 years after the completion of the housing project.
2. States Select Developers for the Housing Project
States have the authority to decide the location, type, and characteristics of the affordable housing project. The credits can be used to build new houses or renovate existing building projects. Each state writes its own QAP (Qualified Allocation Plans) that details the selection criteria of developers for the housing project. Then they invite bids from developers, rate them, and award the tax credit allocation to those developers who meet the majority of the criteria set in QAP.
3. Developers Receive Funding from Enterprises
The developers “sell” the tax credits to enterprises known as “Syndicators” or “Fund Managers” to fund the housing project. The developers use the fund obtained from the enterprises to substantially reduce the cost of the project and therefore lower the rent of the housing project.
4. Enterprises Sell the Tax Credits to Investors
The enterprises, usually insurance companies or wealthy individuals, further sells the tax credits to individual investors who must invest in the project to become equity stakeholders of the project. The investors use these credits to offset tax obligations in their respective states. However, investors receive this tax credit annually over a period of 10 – 11 years.
5. Houses are Rented to Low-income People
The main beneficiaries of the LIHTC housing program are the low-income family. The houses built through this affordable housing project are rented to families whose income is less than 60% of the median income of the region. Low-income tenants can be charged up-to a maximum of 30% of their eligible income.