What Are LIHTC – Low Income Housing Tax Credits

The most extensive and affordable housing program in the United States at the present moment is the Low Income Housing Credit Tax Credit program. The program was started as a result of the Tax Reform Act of 1986 and it is intended to give incentives to those who utilize private equity to develop affordable housing, especially those meant for the low income Americans. LIHTC is currently responsible for over 90% of all the affordable rental houses created in the United States as of this year.

How LIHTC Program Works

The LIHTC program works through the provision of funds for the development cost of low income housing. It gives the investor the privilege to take a federal tax credit equivalent to the percentage of the cost which would have been incurred in the development of a low income housing project. To fully benefit from the LIHTC program, a developer will come up with a development proposal for low income units and present it to a state agency, seek allocation of tax credits, implement the project to completion, certify all the costs incurred then rent up the units to low income tenants.

The program is structured in a manner that it will be the private investor to bear the financial burden in the event that the project doesn’t work out successfully. Through the pay-for-performance accountability approach, most of the private investors dealing with or planning to deal with LIHTC are much disciplined and this has led to foreclosure rate of less than 0.1% which is far much less than the normal market rates.

The Application Process

The first step in applying for LIHFC is for the project owner to submit his application to the relevant state authority who will then consider the application competitively. The application should include the estimated costs of the project as well as the commitment to comply with any of the following conditions-:

• At least 40% of the houses in the project are both restricted and occupied by people who earn 60% or less of the AGMI (area gross median income).
• At least 20% or more of the residential houses are both restricted and occupied by people who earn 50% or less than the AGMI.

Once the project is completed, the low income tenants may have to pay a rent which is 30% of the maximum eligible income. There is however, no limits for tenants who are not classified as low income earners.