What Is the Low-Income Housing Tax Credit (LIHTC)?

The Low-Income Housing Tax Credit (LIHTC) is a tax incentive for housing developers to construct, purchase, or renovate housing for low-income individuals and families. The Low-Income Housing Tax Credit was written into the Tax Reform Act of 1986.

There are specific qualifications residents must fulfill to benefit from these types of housing projects, including maximum income guidelines.

Key Takeaways

  • The Low-Income Housing Tax Credit (LIHTC) subsidizes the creation of low-income housing by offering a 10-year tax credit to these projects.
  • The LIHTC is managed by the federal government and funds are allocated to states according to their population.
  • To qualify for the LIHTC, a project must commit to renting to tenants earning less on average than the median income in the area for a 15-year period.
  • At the state level, there are usually more eligible projects competing for credits than there are credits.

Understanding the Low-Income Housing Tax Credit

The Low-Income Housing Tax Credit also provides an income incentive for those who invest in low-income housing projects. It is intended to stimulate the creation of more housing for low and middle-income families in communities that would otherwise be out of reach. Typically, the dwelling types that receive the Low-Income Housing Tax Credit are multi-family properties.

There are two main types of credits available. The first is a 9% credit, which can only be used if the building project will have no other credits or government subsidies applied to it. The second type is a 4% credit, which can be used in conjunction with additional tax credits. These credits are applied over a ten-year period and can cover almost the entirety of the taxable expense for the building.

The tax credits are allocated to each state by the federal government. From there, each state may choose which developers can take advantage of these credits for their housing projects. Not every developer or investor will be able to take advantage of this program as there are more applications than available permits issued for construction.

Qualifying for the Low-Income Housing Tax Credit

A wide variety of properties can be eligible for the Low-Income Housing Tax Credit, but more projects are competing for the credits than there are credits, as these are allocated based on state population. To qualify for the LIHTC, a project must meet one of the following conditions:

  1. Twenty percent or more of the rental units are rented to tenants earning 50% or less of the median income in the area based on the family size.
  2. Forty percent or more of the rental units are rented to tenants earning 60% or less of the median income in the area based on the family size.
  3. Forty percent or more of the rental units are rented to tenants with income averaging no more than 60% of the median income in the area and no units are rented to tenants earning more than 80% of the median income.

All of the projects receiving the LIHTC must continue to meet one of these income conditions for a period of 15 years. If the project doesn't comply, the value of the tax credit can be recaptured. One common criticism of the tax credit is that many of the properties in desirable locations cease to be accessible for low-income households once the 15 year period has elapses.

Support for People Looking for Low Income Housing

Low-income housing refers to any housing project or residential building that rents units out to tenants who qualify for reduced rent based on income and family size, or who receive a federal stipend to help make their monthly rental payment. These residential units can either be managed by a housing authority or they can be privately managed by landlords or rental agencies that accept a government-issued payment in conjunction with their tenant’s rental payment.

While the Low-Income Housing Tax Credit is intended to spur the creation of more low-income housing, there are other types of supports for the people seeking low-income housing. Low-income housing subsidies are offered through the Department of Housing and Urban Development (HUD).

The income qualifications can be found on HUD’s web site and they are subject to change as wages grow or decline in a given area. A prospective renter must earn less than 50 percent of the median income in their area to qualify. While the aid is available to single renters as well as families, there are qualifications for room counts in prospective homes and single renters may be excluded from a housing project due to lack of availability of properly sized units.

Low-income housing should not be confused with affordable housing, which is for families who are spending more than 30 percent of their income on housing.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).