What's a LIHTC?: The Low Income Housing Tax Credit (LIHTC - often pronounced "lie-tech", Housing Credit) is a dollar-for-dollar tax credit in the United States for affordable housing investments. It was created under the Tax Reform Act of 1986 (TRA86) that gives incentives for the utilization of private equity in the development of affordable housing aimed at low-income Americans. LIHTC accounts for the majority - approximately 90 percent - of all affordable rental housing created in the United States today.
The credits are also commonly called Section 42 credits in reference to the applicable section of the Internal Revenue Code. The tax credits are more attractive than tax deductions as they provide a dollar-for-dollar reduction in a taxpayer's federal income tax, whereas a tax deduction only provides a reduction in taxable income. The "passive loss rules" and similar tax changes made by TRA86 greatly reduced the value of tax credits and deductions to individual taxpayers. As a result, almost all investors in LIHTC projects are corporations.
How Tax Credits Are Allocated: Each year, the IRS allocates housing tax credits to designated state
agencies-typically state housing finance agencies - which in turn award the
credits to developers of qualified projects. Each state is limited to a total
annual housing tax credit allocation of $1.75 per resident, with only the first
year of the 10 years of tax credits counting against the allocation.
States allocate housing tax credits through a competitive process. The state
allocating agency must develop a plan for allocating the credits consistent with
the state's Consolidated Plan. Federal law requires that the allocation plan
give priority to projects that (a) serve the lowest income families; and (b) are
structured to remain affordable for the longest period of time. Federal law also
requires that 10 percent of each state's annual housing tax credit allocation be
set aside for projects owned by nonprofit organizations. The credit amount for a project is calculated based on the costs of
development and the number of qualified low-income units, and cannot exceed the
amount needed to make the project feasible.
A State has two years to award housing tax credits to projects. Tax credits
not awarded in a year may be carried forward to the next year. If a state is
unable to use its tax credits over a two-year period, they are returned to a
national pool for re-allocation. If a state awards tax credits to a project that
is not completed and the tax credits are returned, the state has an additional
two years to award the tax credits to another project within that state.
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