What Is a Tax Credit Property?

A tax credit property is an apartment complex or housing project owned by a developer or landlord who participates in the federal low-income housing tax credit (LIHTC) program.

These developers and landlords can claim tax credits for eligible buildings in return for renting some or all of the apartments to low-income tenants at a restricted rent.

Key Takeaways

  • A tax credit property is an apartment complex or housing project owned by a landlord who participates in the federal low-income housing tax credit (LIHTC) program.
  • Landlords can claim tax credits for eligible buildings through the LIHTC.
  • Apartment buildings, single-family homes, townhouses, and duplexes can qualify for the credit.
  • The program is designed to encourage private investors to build housing for low-income populations.
  • There is a significant lack of affordable housing for low-income populations.

How Tax Credit Properties Work

The low-income housing tax credit (LIHTC) is designed to lower the rents that low-income tenants have to pay. The government subsidizes property owners who acquire, construct, and rehabilitate affordable rental housing. The LIHTC was enacted as part of the 1986 Tax Reform Act.

According to The Tax Policy Center, since the mid-1990s, approximately 110,000 affordable rental units have been constructed under the LIHTC each year giving a total of 2 million units since its inception.

The federal government issues tax credits to state governments. The credits are then awarded through housing to private developers of affordable rental housing projects. Typically, developers sell the credits to private investors in exchange for funding. Investors or developers can claim the tax credits once the housing is rented and over a 10-year period.

How Property Owners Qualify for the Credit

Apartment buildings, single-family homes, townhouses, and duplexes can qualify for the credit. Owners and developers must meet the following income and gross rent criteria.

  1. At least 20% of units must be occupied by tenants whose income is 50% or less of the area's median income adjusted for family size (AMI).
  2. At least 40% of the units are occupied by tenants with an income of 60% or less of AMI.
  3. At least 40% of the units must be occupied by tenants with an average income of no more than 60 percent of AMI, and no units can be occupied by tenants with income greater than 80% of AMI.

The gross rent test requires that rents do not exceed 30% of either 50 or 60% of AMI, depending upon the share of tax credit rental units in the project. All LIHTC projects must comply with the income and rent tests for 15 years or the credits are recalled. In addition, an extended compliance period of thirty years is generally imposed.

Investors in LIHTC projects tend to be corporations with sufficient income tax liability to take advantage of non-refundable tax credits. Financial institutions, for example, have substantial income tax liabilities, a long planning horizon, and often receive a Community Reinvestment Act credit for LIHTC investments.

Costs and Benefits of Tax Credit Properties

The LIHTC is estimated to cost around $9.5 billion per year, according to the Tax Policy Center. It is designed to create affordable rental housing for low-income households. Supporters of the program emphasize the lack of quality housing in low-income communities and the need for incentives to encourage property owners to build quality and affordable housing.

Critics of the LIHTC argue that the federal subsidy per unit of new construction is too high because it compensates and finances too many players—organizers, syndicators, general partners, managers, and investors.

LIHTC projects are sometimes concentrated in low-income communities where there is limited economic opportunity.

As a result, critics state that a significant portion of the federal tax subsidy does not go directly toward the creation of new rental housing. Critics also state that statute and regulations are overly complex.

Lastly, LIHTC projects tend to be concentrated in areas of limited economic opportunity rather than in more affluent areas where residents have access to better-paying jobs and better schools. This can exacerbate the problem of inequality that exists in society. Finally, it might be difficult for landlords to keep the housing affordable once the required compliance periods are over.