The Low Income Housing Tax Credit is a federal program that provides tax credits to developers who build low-income housing. State authorities distribute the credits according to federal guidelines, and projects must meet income threshold requirements and maintain standards for at least 30 years. Investors can use the credits to reduce their tax liability for ten years.
The Low Income Housing Tax Credit is a United States federal subsidy program that was enacted in 1986. The goal of this initiative is to provide incentives for low-income housing development in all states. This is accomplished by giving developers tax credits, which they can sell to investors. The Low Income Housing Tax Credit program requires the joint efforts of the Internal Revenue Service (IRS), the Department of Housing and Urban Development (HUD), and individual state agencies.
Although the Low Income Housing Tax Credit is a federal program, it is implemented with the assistance of state authorities, such as housing finance agencies. The process begins when the IRS provides credits to a state authority. It is then the responsibility of that authority to distribute the credits to the developers who meet the requirements. Credits are transferred from the federal government to state authorities each year. A state authority has two years to disburse the credits before they are returned to the federal government for redistribution.
Each state’s authority can develop a distribution plan, but it must adhere to certain federal guidelines. First, the state must prioritize distribution to developers with projects that are for individuals at the lowest income levels. Second, priority should be given to projects designed to keep costs down for the longest periods of time. Third, 10 percent of the credits awarded to a state must be reserved for projects described by nonprofit organizations.
In addition to these distribution rules, there are also eligibility rules for those who want to get a low-income housing tax credit outlay. The federal government has outlined two income threshold requirements. One, known as the 20-50 rule, requires rental restrictions and 20 percent occupancy by people whose income is at least 50 percent below the area median income, which is determined by HUD. The second threshold requirement, known as the 40-60 rule, requires rental restrictions and occupancy of 40 percent of the units by individuals whose income is at least 60 percent below the area median income. A project must meet one or the other of these standards.
The low-income restricted rate must take into account utility rates. Additionally, in order for a developer to receive credits, they must sign a written agreement that the property will maintain these standards for at least 30 years. Once the developer receives the credits, they can sell them to investors. Investors can use the Low Income Housing Tax Credit allowance they receive to reduce their tax liability for ten years, if the property remains in compliance.
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