What is low income tax credit housing? How to qualify?

The low income tax credit housing plan or Low-Income Housing Tax Credit (LIHTC) program is a helpful endeavor by the U.S. government to create affordable housing for those who need financial aid. 

LIHTC grants state and local agencies the power to allocate approximately $9 billion in federal tax credits each year. Developers, upon receiving these tax credits, can offset a dollar’s equivalent of their owed federal income tax. Keep in mind that the tax credits are contingent on the number of low-income housing units the developer intends to construct.

What is the Low-Income Housing Tax Credit plan?

The LIHTC aims to encourage the construction of affordable homes for low and middle-income families. There are two main types of federal tax credits for developers.

The first is a 9% credit. But, it can only be used if the building project won’t receive other credits or government help. The second type is a 4% credit. And, it can be used with additional tax credits. These credits are spread over ten years and can cover most of the building’s taxable expenses.

The federal government gives these tax credits to each state. Then, each state decides which developers can use them for their housing projects. However, not every developer can participate because there are more applications than available permits for construction.

When was low-income tax credit housing created?

The LIHTC program was created in 1986 through the Tax Reform Act. The primary aim was to encourage the development of affordable rental housing for lower-income households. By providing tax credits to developers, the government sought to stimulate the construction and preservation of housing units for individuals and families with limited financial means. The program aimed to address the shortage of affordable housing and promote community development. Simply put, the LIHTC is a tax incentive for housing developers to construct, purchase, or renovate housing for low-income individuals.

Thanks to the program, the U.S. Department of Housing and Urban Development (HUD) reports that there were around 3.44 million affordable housing units created between 1987 and 2021.

Why is LIHTC important?

By offering this financial support, the LIHTC program aims to address the critical need for affordable housing, promote community development, and improve living conditions for individuals and families facing economic challenges.

Developers who participate in the program can receive tax credits for the acquisition, rehabilitation, or new construction of rental housing for lower-income households. 

How does low-income tax credit housing work?

The collection of data by the Low-Income Housing Tax Credit (LIHTC) program involves both property-level and tenant-level information. At the property level, HUD maintains a database containing details about the size, unit mix, and location of individual LIHTC projects. 

On the tenant level, HUD gathers demographic and economic data on households residing in LIHTC properties. This data is obtained from state housing finance agencies, which administer the LIHTC program. The tenant information helps assess the impact of the program on the individuals and families it aims to serve.

In addition to property and tenant data, HUD also provides information on Qualified Census Tracts and Difficult Development Areas under the LIHTC program. This comprehensive data collection process enables ongoing evaluation of the program’s effectiveness in providing affordable housing solutions.

Which properties qualify for the Low-Income Housing Tax Credit program?

Various types of rental properties qualify for the Low-Income Housing Tax Credit (LIHTC) program. These include apartment buildings, single-family homes, townhouses, and duplexes.

The eligibility of a property is often determined by factors such as the income levels of the tenants, the rents, and compliance with certain affordability restrictions over a period. 

Owners or developers of projects receiving LIHTC qualified allocation plans commit to fulfilling an income test for tenants and a gross rent test. 

• At least 20 percent of the project’s units be occupied by tenants with an income of 50 percent or less of the area median income (AMI) adjusted for family size.
• A minimum of 40 percent of the units be occupied by tenants with an income of 60 percent or less of AMI.
• At least 40 percent of the units be occupied by tenants with income averaging no more than 60 percent of AMI, and no units be occupied by tenants with income greater than 80 percent of AMI.

The gross rent test mandates that rents do not surpass 30 percent of either 50 or 60 percent of AMI, depending on the proportion of tax credit rental units in the project. All LIHTC projects must adhere to the income and rent tests for 15 years, or credits may be reclaimed. Additionally, a generally imposed extended compliance period of 30 years ensures sustained adherence to program requirements.

How can you qualify for low income tax credit housing assistance?

To qualify for the Low-Income Housing Tax Credit (LIHTC) program, individuals or families typically need to follow specific criteria set by the program guidelines. 

Firstly, applicants must identify and apply for housing in properties that are eligible for LIHTC. These properties are designated by state and local LIHTC-allocating agencies.

Income eligibility is a key factor, and applicants usually need to have an income below a certain percentage of the AMI. 

Additionally, applicants may need to meet other requirements related to factors such as family size, citizenship status, and rental history. The application process typically involves submitting documentation to verify income and other eligibility criteria. 

Read more: Tax benefits of overseas homeownership

Key takeaway

The LIHTC federal program boosts the creation of affordable housing by tax credit allocation to builders for these projects. Many types of properties, including single-family homes, apartments, and townhouses, can qualify for this credit. To get the tax credit, a housing project must agree to rent to tenants with an average income below the area’s median income. And, this commitment is for 15 years. People looking for low-income housing must find a property that qualifies for the tax credit and meets specific income requirements.

FAQs

What does low-income housing mean?

Low-income housing refers to housing projects or residential buildings that offer rental units to tenants eligible for discounted rent based on their income and family size. It may also include individuals who receive housing vouchers to assist in covering their monthly rental payments.

Who administers the LIHTC program?

The housing units are administered by state and local LIHTC-allocating agencies. It could be a housing authority or private landlords who accept government payments along with the tenant’s rental payment.

How can tenants find LIHTC housing?

Prospective tenants looking for LIHTC housing can inquire with local housing authorities, check online databases, or contact property management companies to identify eligible properties. 

How do developers receive LIHTC benefits?

Developers receive LIHTC benefits in the form of tax credits. They can use these to offset their federal income tax liability over a ten-year period.

What are the income and rent requirements for LIHTC properties?

LIHTC properties must adhere to income and rent tests. These typically involve renting to tenants with incomes below a certain percentage of the area median income.

Can individuals apply for LIHTC directly?

No, individuals cannot directly apply for LIHTC. The program is for developers who undertake affordable housing projects.

What is the impact of LIHTC on rental prices?

LIHTC aims to keep rental prices affordable for lower-income tenants. Rents in LIHTC properties are subject to specific guidelines to ensure affordability.

Written by Ramona Sinha. December 18, 2023

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.