Low Income Housing Tax Credit Program (LIHTC)
The Low Income Housing Tax Credit (LIHTC) program is currently the country’s most extensive affordable housing program. The program was added to Section 42 of the Internal Revenue Code in 1986 in order to provide private owners with an incentive to create and maintain affordable housing.
The LIHTC program works through a subsidy mechanism. The Internal Revenue Service (IRS) allocates funds on a per capita basis to each state. Currently, each state receives $2.00 per capita. However, the Housing and Economic Recovery Act of 2008 temporarily increased the maximum allocation per person to $2.20 through 2009.
Each state has a housing finance or other agency (HFA) that assumes responsibility for allocating tax credits to developers. The process by which the HFA allocates the credits is competitive and uses criteria enumerated in the state’s Qualified Allocation Plan.
Investors buy income tax credits in qualified properties that have received state allocation, creating cash equity for owners that reduces project development debt burden. In exchange, the owner agrees to rent a specific number of units to qualified tenants at specified rents, usually below-market. Two levels of tax credits are available: one at 9% of depreciable basis, competitively allocated; the other, at 4% of depreciable basis, comes with state bond financing, which is capped and allocated by a state agency, which may or may not be very competitive.