Low Income Housing Tax Credit

Learn how the Low-Income Housing Tax Credit program can help investors in residential real estate.

There is a rapidly growing need for low-income housing in the United States, a need that is not being met. A recent Harvard Joint Center for Housing Studies report found that there are only 11.6 million affordable rental homes available to 18 million low-income renters--a 6.4 million home shortfall.

Anyone thinking about investing in this market needs to know about the the Low Income Housing Tax Credit (LIHTC) program. The LIHTC program was created by Congress back in 1986 to help spur investment in low-income rental housing. Virtually all developers of low-income multi-family housing built today participate in the LIHTC program. Over the past 26 years, the Housing Credit program has financed the development of over 2.6 million rental homes throughout the nation

The LIHTC program is complex. Here are some basics:

How the LIHTC Program Works

Under the LIHTC program, the states award federal housing tax credits to developers of qualified projects. The credit can be used either to construct new or to renovate existing rental buildings. The developers then sell these credits to investors to raise capital (or equity) for their projects, which reduces the debt that the developer would otherwise have to borrow. Because the debt is lower, a tax credit property can offer lower, more affordable rents.

Investors in projects that are not subsidized by the federal government get an annual tax credit of approximately 9% of project construction costs each year for ten years. Investors in federally subsidized projects receive up to a 4% credit for ten years. In addition, to qualify for the full credit, the property must be maintained as a low-income property for at least 15 years.

How to Get the Low-Income Housing Credit

No need to rush out and buy an apartment building. Individual investors can get the credit by buying into limited partnerships or limited liability companies (LLCs) put together by syndicators to invest in qualifying low-income housing projects. These partnership or LLC interests can be purchased through brokers and financial planners for as little as $5,000. The investment is made at the beginning of the construction period, which may take a year or more, while the tax credits are paid only when the project is completed and the housing units rented.

The low-income housing credit program is funded by the federal government, but operated by state tax credit allocation agencies. These state agencies choose which projects in their states receive the credit. Each state has only so many credits to hand out, based on its population.

More Information on the Low-Income Housing Credit

For information on the LIHTC program, contact your state tax credit allocation agency. You can find a list at www.novoco.com/stcaa.shtml. Also, check out the website of the National Housing & Rehabilitation Association.

Caution: Low-income housing projects are complex, long-term, and often risky investments. For example, a project could end up losing money if it fails to meet all the requirements for the credit or has trouble attracting tenants. Seek competent legal and tax advice before making any investment in a low-income housing project.

April 2016

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