The Low-Income Housing Tax Credit (LIHTC) is a tax credit intended to encourage the development of affordable rental housing. The credit is available to state and local governments, nonprofit organizations, and private corporations that build housing to be occupied by families with incomes at or below 80 percent of the area median income.
The Low-Income Housing Tax Credit program provides tax credits to developers to offset the cost of building affordable housing for low-income households. The LIHTC was created in the Tax Reform Act of 1987, and there are two basic types of housing eligible for the LIHTC: rental housing, which the IRS defines as the provision of housing for rent or lease, or cooperative housing, defined as housing that receives funds from any legal entity, including the government.
Qualifying for the Low-Income Housing Tax Credit
The Low-Income Housing Tax Credit is a federal tax credit for investments in low-income housing. These credits can be used to reduce the amount of income taxes a taxpayer must pay on investment income, such as rental income from a rental property that is owned by a taxpayer with a low income. In order to qualify for a credit, a taxpayer must own or lease a qualified low-income housing project in the United States, meaning that the taxpayer must have an active mortgage on the housing project and be considered a “qualified investor” for purposes of the Low-Income Housing Tax Credit.
In order to qualify for the Low-Income Housing Tax Credit, a property must meet a set of eligibility requirements set by the U.S. Department of Housing and Urban Development. The requirements include being a low-income housing project, a permanent structure, a number of units, and a 10% or less gross income limit. As a result, a property must also be able to find a qualified tenant.
To qualify for the Low-Income Housing Tax Credit, a project must meet any of the following conditions:
- At least 20% of the rental units should be rented to tenants who earn 50% or less of the median income based on the family size.
- At least 40% of the rental units should be rented to tenants who earn 60% or less of the median income based on the family size.
- At least 40% of the rental units should be rented to tenants who have an income averaging not more than 60% of the median income, and no units are rented to people earning more than 80% of the median income.
The housing projects receiving the LIHTC must meet any one of the above-stated income conditions for 15 years.
Final Words
It is understandable why LIHTC has gained popularity. The tax credit has substantially incentivized developers to build affordable housing, especially for lower-income households who live in areas that do not have much housing available to them. It has also encouraged developers to renovate existing buildings instead of tearing them down. By increasing the supply of affordable housing, the program has helped millions of Americans to find a place to live.
To know more about Low-Income Housing Tax Credit, attend the Compliance Prime webinar.
