The Low Income Housing Tax Credit (LIHTC) is a federal tax credit provided to developers and real estate investors who purchase, build or otherwise invest in residential, rental properties that are affordable by low-income individuals. The credit cannot be claimed without having first been awarded by your state's housing agency.
The LIHTC is not a credit given to individuals living in low-income housing. Instead, it is a federal program which gives housing developers tax credits for establishing low-income houses. Once the developer proves that they meet LIHTC guidelines, they are awarded credits based on the number of houses they build. The developer can then sell these credits to investors in their project. The investors can then claim their purchased credits on their yearly tax returns. An investor can be an individual or corporation.
The purpose of this program, which was established in the mid-1980s, is to encourage developers and investors to establish more low-income housing. Like other types of tax credits, the LIHTC reduces the total amount of tax liability a taxpayer owes the IRS. This can result in significant tax savings.
Unlike other types of tax credits, however, the LIHTC is claimable for as long as ten years. The only requirement to repeatedly claiming this credit is that the property must continue to meet federal low-income housing guidelines and the LIHTC guidelines every year it is claimed.
A State's Role in LIHTC
Despite being a federal tax credit, it is actually state agencies that award credits to developers. The federal government through the U.S. Department of Housing and Urban Development (HUD) awards credits to each state's HUD. The state HUD subsequently awards the credits to developers.
Federal law limits the amount of money in the form of a credit that it can award per low-income resident. Additionally, federal law requires how many credits must be set aside for non-profit agencies.
Federal law also requires states to distribute their allocated credits within two years of their receipt. Credits can be carried over for two years, but after that time they are returned to the federal pot and reallocated among the states.
The Amount of Credit
The specific dollar amount of a LIHTC depends on the property and number of low-income residents it houses. Each year the dollar amount attributable for each occupant adjusts for inflation. The amount of money each state can distribute depends on the amount of low-income housing they currently have.
Eligibility for LIHTC
Eligibility to claim LIHTC depends on the property and not the developer or investor (except, of course, those credits required to be disbursed to non-profit agencies). Requirements include:
- Being intended for low-income residents and meeting the federal requirements for those properties
- Being a residential and not a commercial property
- Restricting the amount of rent that is charged each month
- Establishing the property as low-income for a minimum of 30 years
The federal requirements the property must satisfy refer to the number of low-income residents on the property and their yearly income. Properties must either fall within the 20-50 rule or the 40-60 rule:
- 20-50 Rule: At least 20 percent of the property's residents must have an income 50 percent below HUD's determined median income for the area.
- 40-60 Rule: At least 40 percent of the property's residents must have an income of 60 percent below HUD's determined median income for the area.
Investors or owners of property not meeting these requirements are ineligible to claim the credit. Proof of eligibility must usually be included with filed tax returns.
Claiming Your Credit
If you own a low-income property, you may be entitled to claim a credit against your taxes. Prior to claiming your credit, however, ensure that the property's statistics meets federal guidelines and that you have been awarded credits from your state housing agency.