Low-income Housing Tax Credits For Dummies


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Percent Credit Vs 9 Percent Credit

MO may end tax credits for low-income housing

The LIHTC is composed of two major credit types: the 4 percent credit and 9 percent credit. Credits are redeemable every year for 10 years and calculated as 4 percent or 9 percent of the projects qualified basis, a figure calculated from the gross construction costs of the projects affordable units.

Both credits provide housing tied to the same affordability requirements. The 4 percent credit is awarded non-competitively through the federal government and does not impact a state HFAs annual allocation. In other words, all projects that meet the 4 percent criteria will receive the credit. The 4 percent credit is for projects already receiving most of their funding through tax-exempt bonds or other government subsidies and the acquisition, rehabilitation, and conversion of existing structures to affordable housing.

The 9 percent credit is awarded through a competitive allocation process by state HFAs. States develop a Qualified Allocation Plan , which details the minimum requirements for credit eligibility as well as scoring criteria to compare project applications. The specific criteria of each state are unique. However, there are several general goals that a majority of HFAs seek to incentivize, such as number of affordable units, project cost thresholds, and quality of housing.

To illustrate how these calculations interact, Mark Keightley and Jeffrey Stupak at the Congressional Research Service provide an example in their background primer on the LIHTC:

How Are Htc Units Different From Section 8 Subsidy

HTC units offer income qualified tenants a unit at a reduced rental rate that is restricted by annually published rent guidelines. Section 8 determines the rent based on 30% of a tenant’s actual income. HTC rental rates may increase or decrease annually based on published limits, but Section 8 rents increase only when the occupying household’s income increases or decreases or amended budgets containing proposed rent increases are requested by the Section 8 development owner.

What Is The Purpose Of The Htc Program

The HTC program was designed to:

  • Provide a source of equity financing for the development of affordable housing
  • Maximize the number of affordable units added to the state’s housing supply
  • Ensure that the state’s affordable housing supply is well maintained and operated, serving as a credit to the communities in which affordable housing is constructed and operated and
  • Prevent losses in the state’s supply of affordable housing.
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    If the video simplifies the LIHTC program, my multi-paragraph explanation simplifies it even further, to the point that it doesnt reflect just how complicated it really is.

    But what if we started all over again and made the program itself really, really simple. What if,

    • Businesses or individuals could directly invest in housing projects that would produce rent restricted units
    • Projects that set aside at least 50% of their units for rents less than 60% of Area Median Income would be eligible
    • The state Housing Finance Agency would approve the application and certify the project when Certificate of Occupancy was approved
    • The business or individual could apply the tax credit to their taxes when they filed them the following year.

    Developer A is building 100 apartment units in Seattle at a total development cost of $250,000 per unit, or $25 million. Half the one-bedroom units will rent for about $1000, about 50% AMI. An investor contributes $500,000 and generates a $625,000 tax credit that can be applied to their tax bill for the year the building goes into service. There would be many other investors too, both large and small that could benefit themselves and the project.

    Program Administration & Qualified Allocation Plans

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    Although the credit was authorized by federal law, and reduces federal tax liability, the federal government has put the administration of the program in the hands of the states. Each state has created a housing finance authority that allocates credits to developers, administers the states criteria and bidding process for projects, and monitors developer compliance with program regulations.

    A states criteria and regulations are set out in its Qualified Allocation Plan . While the QAP must contain certain federal law provisions, these provisions are viewed as minimums, and the states rules may be stricter. Additionally, a states QAP establishes a prioritization for the types of projects it wishes to incent. Although the goal of the LIHTC program is to create more affordable housing, each states housing needs are different, and their QAP priorities reflect this. For example, in Colorado, the state will generally grant credits to new construction projects before awarding them to acquisition and rehab projects.

    That being said, even though there is significant flexibility in what a states QAP may include, the program does require that a QAPs priorities serve the lowest-income households for the longest period of time and that at least 10% of the credits awarded must be given to projects with non-profit developers.

    To see an example of a states plan, take a look at Missouris 2015 QAP.

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    Rent Income And The Next Available Rule

    Many LIHTC projects include a mixture of rent-restricted units for low-income households and market-rate rental units. While there is no restriction on the amount a developer can charge for market-rate units, as to the affordable units, rents cant be more than 30% of the income ceiling below which tenants are eligible for a low-income unit. This income amount is either 50% or 60% of the Area Median Income depending on whether the developer committed to the 20 at 50 or 40 at 60 set-aside.

    Note that the low-income rent isnt based on an individual tenants income, but rather on the 30% ceiling. An individual tenants income is relevant only to determine if they initially qualify as a low-income tenant, and determine if the developer needs to make more affordable units available if the tenants income increases.

    If a low-income tenant increases its income up to 140% of the income limit, it may still stay in the unit at the below-market rate with no other consequences to the developer. However, if its income rises to more than 140% of the limit, then the next available unit rule comes into play.

    Under this rule the developer must rent the next available unit to a new low-income qualified tenant at the below-market rate. This is done because the program wants to encourage low-income tenants to increase their incomes , while at the same time still making the same number of units available to low-income households.

    Are Htc Developments Monitored After They Are Constructed

    TDHCA monitors and physically inspects all properties that have received tax credits and/or multifamily funds from any TDHCA program. Property owners who do not follow applicable guiding program rules and regulations and property standards may be subject to certain actions designed to encourage compliance. These actions, if not promptly addressed, may lead to other more serious actions such as the assessment of administrative penalties or, in extreme instances, debarment from TDHCA’s affordable multifamily programs.

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    Is There More Than One Type Of Tax Credit

    Yes, there are two types of HTCs: 9% HTC and 4% HTC.

    9% HTC

    • The 9% HTC program is highly competitive.
    • The amount of tax credits available in each region is determined through the Regional Allocation Formula there are separate set-asides for at risk and US Department of Agriculture assisted developments.
    • At least 10% of the allocation must be used for qualified non-profits.
    • Applications are scored and ranked within their region or set-aside.
    • Scoring criteria range from financial feasibility, various indicators of local support, size and quality of units, amenities and services to be provided to the tenants, economic health of the community, and more.
    • Scoring reflects requirements found in state law and program rules the program rules are known as the Qualified Action Plan .

    4% HTC

    • 4% HTCs are awarded to developments that use tax-exempt bonds as a component of their financing.
    • Applications are accepted throughout the year.
    • 4% HTCs are available statewide they are not subject to regional allocation.

    Financial Crisis Impact On Lihtc

    Making Affordable Housing Happen with the Low-Income Housing Tax Credit (LIHTC)

    Under law, the only investors eligible for Low-Income Housing Tax Credit investments are large C corporations. As the financial markets deteriorated in the second half of 2008, so did the C corporations profits that are typically offset by tax credits, like the LIHTC. As a result, the market for LIHTCs was decimated. The development of new tax credit properties and rehabilitation activities for older affordable housing properties froze completely.

    Congress took action in February 2009 to help restart the LIHTC market. The American Recovery and Reinvestment Act of 2009 created two gap-financing programs to help tax credit properties, which were ready to begin construction, get additional financing.

    First, Title XII of the Recovery Act appropriated $2.25 billion to the HOME Investment Partnerships Programadministered by the U.S. Department of Housing and Urban Development for a grant program to provide funds for capital investments in LIHTC projects. HUD awarded Tax Credit Assistance Program grants to state housing credit agencies to facilitate development of projects that received LIHTC awards between October 1, 2006, and September 30, 2009. The State housing agencies were allowed to offer the assistance in either a grant or loan form to the properties.

    Also Check: Federal Income Tax Forms 2021

    A Tax Incentive For Housing Investors

    The Low Income Housing Tax Credit Program is an investment vehicle created by the federal Tax Reform Act of 1986, which is intended to increase and preserve affordable rental housing by replacing earlier tax incentives with a credit directly applicable against taxable income. Administered in Michigan by the Michigan State Housing Development Authority , this program permits investors in affordable rental housing who are awarded the credit- corporations, banking institutions, and individuals – to claim a credit against their tax liability annually for a period of 10 years.

    A Community Reinvestment Opportunity

    Corporate investors in this program are able to receive the tax credit and may also get additional tax benefits in the form of losses and depreciation. Furthermore, financial institutions may receive credit under the Community Reinvestment Act for their participation in tax credit developments, while corporate entities will be assisting in the creation of affordable housing in Michigan communities.

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    The Residences At North Hill

    7201 Richmond Highway,Alexandria,Virginia 22306

    Residences at North Hill is a brand new family and senior rental community currently under construction in Alexandria, VA. The 279-unit development will feature one-, two-, and three-bedroom apartment homes. Apartments will be affordable at a variety of income tiers, and will include a modern living space and kitchen.

    Residents will enjoy an inviting community building, playground, and a 12-acre public park. This site will be updated as more information becomes available. Located along Richmond Highway, living at Residences at North Hill will afford residents the opportunity to live close to shopping, dining, entertainment, and transportation. The property is located a short-drive from downtown Alexandria, and public transportation makes commuting into Washington D.C. a breeze.

    Leasing activities The Residences at North Hill is expected to begin in the Summer of 2022. This timeframe is subject to construction and other factors. It will be updated as additional information becomes available.

    Please complete the Contact Us form below to be contacted when leasing activities for this location begin. This is not an application or pre-application and in no way implies or ensures any order of notification or residency.

    • On-Site Maintenance

    Low-Income Housing Tax Credit

    Alexandria Low-Income Housing Tax Credit Income Limits

    AMI Band

    How The Tax Credit Program Works

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    The maximum tax credit a project may receive is based on a percentage of the portion of rental housing that the owner agrees to maintain as both rent and income restricted for a period of at least 18 years. At a minimum, either 20 percent of the units must be for residents whose incomes do not exceed 50 percent of area median income or 40 percent of the units must be for residents whose incomes do not exceed 60 percent of the area median income . The rents on the units must also be restricted. An annual credit equal to roughly 9 percent of the qualified basis of construction or rehabilitation costs is available to developments not utilizing federal or tax-exempt financing. An annual credit roughly equal to 4 percent of the qualified basis is applicable where federal or tax-exempt financing is utilized and, in certain cases, for acquisition cost associated with rehabilitation.

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    A Complete Guide To The Low

    Neal Hefferren

    To a developer, affordable housing means lower rents than a market-rate project, lower net operating income, and thus lower returns on their investment. Accordingly, without any outside incentive a developer has little motivation to build affordable housing.

    Unfortunately, the need for affordable housing is significant. According to the National Low Income Housing Coalition, in 2013, for every 100 extremely low income renter households, there were just 31 affordable and available units. The Coalition then noted, in no state can an individual working a typical 40-hour workweek at the federal minimum wage afford a one- or two-bedroom apartment for his or her family.

    Recognizing the need for affordable housing, and the fact that few developers would pursue these projects when market-rate developments offer a higher return, the federal government looked for ways to make affordable housing projects financially attractive to developers. The Low Income Housing Credit program is one of those ways.

    This article details how the program works, including:

    • How the federal government allocates credits to the states
    • How state agencies administer the program
    • The application process for developers
    • Why investors purchase the credits
    • Project rent and income restrictions
    • Compliance periods
    • How the credits are calculated, and
    • How they are claimed

    Lets start with the big picture.

    Who Should Attend

    • Owners, developers, syndicators, property managers, and applicable staff and advisers who need a basic understanding of how the Low-Income Housing Tax Credit works
    • Investors, lenders, underwriters, and others in the housing finance community looking for straightforward and practical analysis of the business as well as the technical issues surrounding today’s use of the Low-Income Housing Tax Credit
    • Housing agency and community development staff, non-profit representatives, and others who want step-by-step information on the use of the Low-Income Housing Tax Credit and how it fits into the overall development process
    • Real estate and tax attorneys, accountants, and other advisors to tax credit participants who need an overview or update of the fundamental rules, techniques, and practices applicable to today’s transactions.

    Also Check: Income Tax Extension Deadline 2021

    What Is The Low

    The Low-Income Housing Tax Credit is a tax incentive for rental owners and developers who provide affordable housing for low-income residents. That means the rent they charge is considered affordable by those whose income falls below the median household income of the area.

    The LIHTC, written into the Tax Reform Act of 1986, was created to get more affordable housing units out there and available to those in need. It provides federal funding for the construction or rehabilitation of these types of rental properties. Without the tax credit for low-income housing, most developers wouldnt invest in these types of properties as they wouldnt make a profit.

    Qualifying For The Credit

    MO may stop tax credits for low-income housing

    Many types of rental properties are LIHTC eligible, including apartment buildings, single-family dwellings, townhouses, and duplexes.

    Owners or developers of projects receiving the LIHTC agree to meet an income test for tenants and a gross rent test. There are three ways to meet the income test:

  • At least 20 percent of the projects units are occupied by tenants with an income of 50 percent or less of area median income adjusted for family size .
  • At least 40 percent of the units are occupied by tenants with an income of 60 percent or less of AMI.
  • At least 40 percent of the units are occupied by tenants with income averaging no more than 60 percent of AMI, and no units are occupied by tenants with income greater than 80 percent of AMI.
  • The gross rent test requires that rents do not exceed 30 percent of either 50 or 60 percent of AMI, depending upon the share of tax credit rental units in the project. All LIHTC projects must comply with the income and rent tests for 15 years or credits are recaptured. In addition, an extended compliance period is generally imposed.

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    How Does The Low

    The federal government gives money to every state for low-income housing tax credits, based on population. Each state has a housing agency that awards the tax credit money to groups of developers according to a plan developed by the state. Real estate developers agree to construct buildings that are available to low-income individuals, and in return, the state gives developers tax credits. Developers then sell the credits to investors to raise the money needed to build. The credits can account for as much as 70% of project funding.

    State housing agencies handle the granting of tax credits and management of the process. They receive a specified amount of tax credit money each year. A common way to allocate is explained by California the credits go to developers of affordable housing projects. Corporations are set up to get investors and equity to create qualified buildings in return for the tax credits.

    Each state handles the requirements for these tax credits differently. Many states, have a developer experience requirement, for example some, like Ohio, may permit newer developers to work with more experienced partners.

    The U.S. Department of Housing and Urban Development provides a list of state housing agencies to help you find the right agency for your state.

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