By: Belinda Lee, Director – Development

The Low-Income Housing Tax Credit (LIHTC) program has been an essential component of affordable housing finance since it was enacted as a part of the Tax Reform Act of 1986. Originally created as a tool to encourage public-private partnerships to increase the low-income housing stock, it has been modified several times. Since inception, it has supported the generation of more than 3.5 million affordable housing units nationwide.

Through the LIHTC program, state and local LIHTC-allocating agencies have the authority to allocate approximately $10 billion in federal funds each year to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households. Generally, the state and local agencies award LIHTC credits to private affordable housing developers through a competitive process. Then, developers typically sell the credits to private investors to obtain funding.

Only rental properties (e.g., apartment buildings, single-family homes, smaller multi-unit buildings) qualify for LIHTC. To qualify, the owners or developers of the affordable housing project must meet certain income tests for tenants and rent. Projects must pass one of the income tests below and agree to comply with these parameters for a minimum of 15 years (though some state agencies may require compliance for 30 years):

• At least 20 percent of the project’s units are occupied by tenants with an income of 50 percent or less of area median income (AMI) 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.

LIHTC offers investors a dollar-for-dollar reduction in their federal tax liability in return for providing capital to support the development of affordable rental housing. This investment helps subsidize the construction of low-income housing, enabling the units to be rented at rates below the market value.

Investors can claim LIHTC credits, which are calculated by multiplying a credit percentage by the project’s qualified basis, over a 10-year period once the affordable housing project is available for tenants. The tax credit is distributed pro rata over this period and can be applied to the construction of new rental buildings or the renovation of existing ones. LIHTC is designed to cover 30 percent or 70 percent of the costs for low-income units in a project. The 30 percent subsidy, known as the automatic 4 percent tax credit, applies to new construction with additional subsidies or the acquisition of existing buildings. The 70 percent subsidy, or 9 percent tax credit, supports new construction without any extra federal subsidies.

LIHTC is essential for the funding of affordable housing projects for several reasons:

• Incentive: By incentivizing private developers to invest in low-income housing projects, LIHTC helps to create and preserve affordable rental units for millions of families. The LIHTC program helps meet the growing need for affordable housing while also offering: Community Reinvestment Act (CRA) benefits to financial institutions, economic advantages for investors, tax revenue for state and local governments, and both construction and permanent job opportunities.

• Financial feasibility: Without LIHTC subsidies, most affordable housing projects would be financially infeasible. Rental properties eligible for LIHTC often have lower debt service payments and vacancies compared to market-rate housing. These properties usually experience a faster lease-up process.

• Housing supply: LIHTC-financed projects increase the housing supply in markets where development would otherwise be challenging.

• Rent burdens: The LIHTC program supports low-income families by lowering their rent burdens, allowing them to allocate more income toward other essentials or savings.

By making housing more accessible, LIHTC contributes to improved health and educational outcomes for residents, ultimately promoting social stability and enhancing quality of life. Its ongoing significance in combating housing insecurity makes LIHTC a vital tool for policymakers, developers and communities alike.