Low-Income Housing Tax Credit - How IT Works

How It Works

The LIHTC provides funding for the development costs of low-income housing by allowing an investor (usually the partners of a partnership that owns the housing) to take a federal tax credit equal to a percentage (up to 70 percent or 30 percent of PV depending on the credit type) of the cost incurred for development of the low-income units in a rental housing project. Development capital is raised by "syndicating" the credit to an investor or, more commonly, a group of investors. To take advantage of the LIHTC, a developer will typically propose a project to a state agency, seek and win a competitive allocation of tax credits, complete the project, certify its cost, and rent-up the project to low income tenants. Simultaneously, an investor will be found that will make a "capital contribution" to the partnership or limited liability company that owns the project in exchange for being "allocated" the entity's LIHTCs over a ten year period. The amount of the credit will be based on (i) the amount of credits awarded to the project in the competition, (ii) the actual cost of the project, (iii) the tax credit rate announced by the IRS, and (iv) the percentage of the project's units that are rented to low income tenants. Failure to comply with the applicable rules, or a sale of the project or an ownership interest before the end of at least a 15-year period, can lead to recapture of credits previously taken, as well as the inability to take future credits. These rules are described in greater detail below.

The program's structure as part of the tax code ensures that private investors bear the financial burden if properties are not successful. This pay-for-performance accountability has driven private sector discipline to the LIHTC program, resulting in a foreclosure rate of less than 0.1% - a percentage far less than that of comparable market-rate properties. As a permanent part of the tax code, the LIHTC program necessitates public-private partnerships, and has leveraged more than $75 billion in private equity investment for the creation of affordable rental housing.