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Low-Income Housing Tax Credit (LIHTC)

Definitions of Low-Income Housing Tax Credit (LIHTC)
  • The Low Income Housing Tax Credit, LIHTC, is a dollar for dollar tax credit applied toward U.S. federal taxes that is awarded by state housing authorities to those who invest capital in the development or rehabilitation of affordable rental housing.


Low Income Housing Tax Credit - LIHTC

What Is The Low Income Housing Tax Credit?

The Low-Income Housing Tax Credit, or LIHTC, is a tax credit created by the Tax Reform Act of 1986 that gives a dollar for dollar tax credit that is applied towards federal taxes on taxes owed by investors in affordable rental housing developments or rehabilitation projects. The ownership syndicate can be structured so the tax credits pass directly to the investors.

How does the Low Income Housing Tax Credit Work?

Real estate developers apply for Low-Income Housing Tax credits through their State Housing Authority in a competitive process for their development or rehabilitation project.

If the project is awarded the credits, the state allocates federal tax credits based on factors such as the cost of the project (excluding land), the portion of low-income rental units in the project, whether the project is receiving other subsidized financing, and several other criteria specified by state under the federal guidelines.

Investors can acquire these tax credits in exchange for an equity investment in the affordable rental housing project. The tax credits are taken over a 10 year period, but the project must remain in compliance with the low-income housing criteria agreed upon by the state and developer for 15 years or longer.

How Are The Low Income Tax Credits Calculated?

The Low-Income Housing Tax Credits are calculated based on the cost of the development or rehabilitation project. Certain costs are excluded, such as land and land acquisition costs to determine the cost basis upon which the credits will be calculated.

Once the cost basis of the project is established, a percentage of the project cost is allocated annually over a ten year period to determine the total amount of tax credits available to the investors.

A new development may qualify for 9% of its cost annually in tax credits, while a rehabilitation project can qualify for 4% of the project cost annually in tax credits over a ten year period. To illustrate, if the development cost of an affordable rental housing project is $1,000,000. The total tax credits that can be taken by the investors each year is 9% x 1,000,000 = $90,000.

This means the project provides $90,000 per year over ten years in tax credits to its investors. As an investor, its important to remember a dollar today is worth more than a dollar tomorrow. Therefore, the tax credits that will be taken in future years should be discounted when determining the amount of equity investment investors make today.


        

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