How Does the Low-Income Housing Tax Credit Work?

The Low Income Housing Tax Credit (LIHTC) became a crucial part of the production and preservation of affordable rental housing in 1986.

Since then, it can be attributed to assisting low-income households with nearly three million affordable housing units. Low income housing is a form of housing that is available to families and tenants who have low- to moderate-income levels in comparison to an area’s median income.

To further the construction, rehabilitation and acquisition of low income apartments, the federal government offers businesses and investors the opportunity to receive a generous tax credit for participating in the program. This credit can be claimed by investors for a period of more than 10 years. In return, investors must comply with income and rent tests for a minimum period of 15 years. Failing to comply with the LIHTC after receiving a credit will result in credits being recaptured. Therefore, it is important to learn more about this invaluable program as well as the expectations that businesses and investors must meet.

Learn About Requirements for LIHTC

If you are interested in investing in low-income apartments, then it is important to understand the eligibility requirements that must be met in order to qualify for the tax credit. During the minimum 15-year period in which you must comply with income and rent tests through the LIHTC program, you must ensure one of the following:

  • That at least 20 percent of all units are occupied by tenants that have an income level that is 50 percent or less of the area’s median income level based upon the family size of the tenants
  • That at least 40 percent of all units are occupied by tenants that have an income level that is 60 percent or less of the area’s median income level based upon the family size of the tenants
  • That at least 40 percent of all units are occupied by tenants that have an income level that is 90 percent or less of the area’s median income level based upon the family size of the tenants, and no other units that are occupied by tenants that have an income that is greater than 80 percent of the area’s median income level for their family size.

In order to comply with the Low-Income Housing Tax Credit program, rental amounts cannot exceed 30 percent of either the 50 or 60 percent of the area’s median income depending on the project completed. In addition to the mandatory 15-year period that rental restrictions are imposed in exchange for tax credits, an extended compliance period is sometimes imposed.

How are low-income housing tax credits calculated?

Tax credit apartments can receive benefits from the LIHTC program for at least 10 years. However, a project must aim to provide low-income housing to tenants who qualify in order for a tax credit to be distributed. Eligible housing projects are awarded either a four percent or nine percent tax credit based upon the project.

Each credit amount is awarded in different ways and may benefit investors differently. Generally, the nine percent tax credit is applied to eligible construction and rehabilitation costs that are considered to be substantial. A four percent tax credit is applied to qualifying buildings that are acquired and rehabilitated for the purpose of providing low income housing to a community.

How to Start Investing in Low-Income Housing

The low income housing tax credit program provides benefits to investors in two ways. Investors receive general tax savings by deducting depreciation to rental properties operating losses, should any occur, as well as receive tax credits that can be used to offset a portion of federal income tax liability.

If you are considering investing in low-income apartments, then you can calculate whether or not an investment is affordable through the use of data collected by the U.S. Census Bureau. By using data that is collected, you can determine the current and historical median income for an area that you would like to invest in.

You can determine your expected gross income per affordable housing unit by calculating 30 percent of the area’s median income. By LIHTC regulations, this is the amount that you will be able to charge tenants while you participate within the program. With your estimated gross income in mind, you can determine profitability by determining the taxes and insurance costs that you will need to pay as the owner of the property.

Next, you must estimate the cost of building and ground maintenance for the units that you will have on your property. When determining whether or not a LIHTC investment is profitable, you may also need to consider the costs of inspections, occupancy certification or other fees that may be charged by the county that your property resides within.

How to Apply for LIHTC

Investing in low-income apartments and other forms of housing can be profitable, especially when considering the tax credits that can be earned through program participation. Additionally, the demand for affordable housing is only increasing, as the gap between the wealthy and less fortunate widens within any given area.

A limited supply and high demand for affordable housing can also make it easier to fill empty units.

Take the time to research the neighborhood that you intend to invest within thoroughly in order to ensure that you find good tenants. Review low-income housing government program requirements for landlords and learn how to submit an application for your property. By doing your research ahead of time, you can save yourself time and hassle as well as ensure that your property meets federal regulations.

Applications for LIHTC can usually be obtained online, by mail or at a local office. Keep in mind that there may be an application fee to submit the request, however, this is not always a requirement. The application will require personal information as well as details about the property.