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Affordable Housing Tax Credits

Created by the Tax Reform Act of 1986, the federal Low Income Housing Tax Credit, also known as Internal Revenue Code Section 42, encourages the private sector to invest in the construction and rehabilitation of affordable rental housing for low and moderate income families. Project sponsors and investors of qualified affordable housing developments can use these tax credits as a dollar-for-dollar reduction of federal income tax liability. The private equity capital generated from the syndication of the tax credits allows residences to be leased to qualified families at below market rate rents.

The amount of tax credits available to a project sponsor is tied to the costs involved in building the low income units. Tax credits are calculated to provide up to 70% of the present value of these costs. The project sponsor solicits investors to become partners in the ownership of the low income buildings. In return for their equity investment, the investors receive the tax credits.

Except for certain projects substantially financed with tax-exempt bonds, a project sponsor must first obtain a tax credit allocation from the designated state agency that has the authority to allocate tax credits under the federal program. To be considered for an award of tax credits, an application must be submitted to the state agency during its annual application acceptance period. The total tax credit dollar amount, that is available for allocation by each state, is limited by its population. In most states, because of excess demand, the competition for these tax credits is very high.

To be eligible to receive the low income housing tax credits, the rental residential building must be placed in service, with at least partial occupancy, within 24 months after December 31st of the year in which the allocation is awarded. Then, the affordable housing project must comply with a number of requirements regarding tenant income, maximum rent levels, and percentage of low-income occupancy for a minimum of 15 years.

 

 

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