The Low-income housing tax credit (LIHTC) – Everything you need to know

The Reform Act of 1986 established the low-income housing tax credit. The act provided a total of $8 billion in tax credits to property owners who rented apartments at lower costs compared to the current market rates. The program is distributed by the state and local agencies. This allows property owners to make back some of the money they would’ve made if they rented at a higher price. It also provides lower-income tenants with affordable housing.

Providing the largest source in affordable housing, the low-income housing tax credit is responsible for over 3 million housing units since its inception in 1986. They continue to subsidize over 100,000 every year now spanning 1,500 projects. The Omnibus Budget Reconciliation act of 1993 officially made the tax credit permanent. Before then it was at risk because it required a three-year review from congress to renew each time.

We all know the 2007-2008 financial had a critical impact on housing marketing. It also impacted the applications for the tax credit. Since property owners were making less and incomes were dropping, most organizations didn’t need the tax credit because they weren’t bringing in much income. The applications for LIHTC dropped dramatically.

In 2009 the LIHTC saw new changes with the American Recovery and Reinvestment Act. Congress needed to find a way to continue to provide housing and new developments for lower-income families but they were struggling to provide funding since investors like Fannie Mae and Freddie Mac could no longer contribute. They allowed developers to transfer their remaining tax credits for project funding. They would pay $0.85 for every dollar in tax credit and this was available for current units where they struggled to find funding. The federal government also included grants to the low-income housing tax credit program to continue the work they’ve been providing.

How does the low income housing tax credit work?

It’s important to note again that the tax credit is provided to the landowners and not the tenants. The tax credits were to be used by the property owner to subsidize new developments or the renovation of older buildings for lower-income households. The credits cannot be refunded but they are able to be transferred. If the property owner decides to sell the unit they’re able to transfer the tax credits to the new owners.

There are three main players in providing the tax credit:

  • Housing Finance Authorities (HFA)- provides guidelines for new projects and reviews applications
  • Internal Revenue Service (IRS)- Divides budget for the income housing tax credit by state
  • Housing and Urban Developement (HUD)- Works on analyzing the nation wide housing market and income levels to identify affordability in different areas

These credits are provided by the IRS and the HFA with guidance from the HUD on income levels and affordability in each state or city. The IRS will divide a budget of $8 billion to each state depending on the population and need. This budget has also increased over the years to combat inflation. Once the HUD and IRS identify affordability and divide the budget between the states, the HFA establishes requirements for the application to receive the tax credit.

The developer will apply for the tax credit and submit it to the HFA. The HFA will review each application to ensure it meets its minimum requirements. Once the application is approved, the project had to be completed and the building in service before the developers could get the tax credit. The HFA will monitor the new units for years and can take away the tax credit if there are any violations by reporting it to the IRS.

Here are a few of the qualifications for the property owners:

  • The unit has to be less then 30% of the tenents adjusted gross income (AGI)
  • 20% of all units in a project are reserved for tenants withh an Area Medium Income (AMI) bellow 50% OR 40% of units reserved for tenants bellow 60% fo the AMI

The property must meet these qualifications for 30 years. The first 15 years they’re closely monitored by the HFA and IRS but they can stop reporting directly to them after that and they are no longer at risk of losing their credits.

Do I qualify for the low income housing tax credit program?

There are a few basic requirements for this program. You can apply to any unit anywhere in the United States which allows you to take advantage of the program without any resident waiting periods. You can take advantage of the program regardless of your citizenship status. This means people with green cards and visas also apply. You are also able to apply even if you’re in a single household which opens up this program to a wider group of people.

Aside from the basic requirements, there are also income eligibility restrictions. Each city has its own affordability index and the general rule they follow is you have to make less than 60% of the AMI to qualify for this assistance. You can look up your local income limits here. It’s important to note that the AMI will increase as the household size increases. They do not look at other expenses when considering candidates for the low-income units.

You can be restricted from this program if you don’t have the best history. This can be on your rental or credit report but these decisions are made on the property level. It’s also much harder for people with a criminal record to get approved for a unit regardless of whether they qualify. If you’ve been convicted of a drug charge in the last three years, you will be denied from the program.

How do I find low-income housing in my area?

We always recommend reaching out to your local Housing and Urban Development Office to see properties in your area that are reserved for lower-income households. Your city should also have an online directory where you can browse properties that are considered affordable units.

Once you find a unit, you’ll have to submit an application. Some people have reported it can take anywhere from a couple of days to a few weeks to see if you’re approved. We always recommend doing it online so you can keep records of everything and it’s easier for the people reviewing the application. Some cities have waitlists and fewer resources so it’s harder for them to keep up with demand. If you decide to join a waitlist, it’s critical you take notes of everything because the waitlists can be so long. You can ask the person you submit your application to or the manager of the property for an estimated time, usually anywhere from months to a year. You’re able to stay in the low-income unit regardless of how much your income increases.