Low-Income Housing Tax Credit (LIHTC)
Low-Income Housing Tax Credit
The Low-Income Housing Tax Credit (LIHTC) is a public/private partnership that leverages federal dollars with private investment to support the production of affordable rental housing.
Developers receive an allocation of LIHTCs from state agencies through a competitive application process. They generally sell these credits to investors, who receive a dollar-for-dollar reduction in their federal tax liability paid in annual allotments, generally over 10 years. The equity raised by selling the credits reduces the cost of apartment construction, which allows the property to operate at below-market rents for qualifying families; LIHTC-financed properties must be kept affordable for at least 30 years. Property compliance is monitored by state allocating agencies, the Internal Revenue Service, investors, equity syndicators and the developers.
The LIHTC has two components. The so-called 4 percent tax credit can be used to subsidize 30 percent of the unit costs in an acquisition of a project and can be paired with additional federal subsidies. In contrast, the 9 percent tax credit supports new construction without any additional federal subsidies by subsidizing 70 percent of the costs.
The program has a long history of successfully generating the capital needed to produce low-income housing while also enjoying broad bipartisan support in Congress. According to the National Council of State Housing Agencies, the program has led to the construction of more than 2.4 million units since its inception in 1986. Maintaining this supply of affordable housing supply is critical given that the market is short at least three million affordable rental units, according to Harvard University estimates. The program has also been an important source of economic development for many communities, helping to revitalize struggling neighborhoods. At its peak, the LIHTC program created approximately 140,000 jobs and $1.5 billion in state and local tax revenues annually.
However, the nation’s financial crisis has caused many of the LIHTC’s largest investors to withdraw from the program. As part of the American Recovery and Reinvestment Act of 2009, Congress enacted two now-expired tax credit exchange programs to bolster the beleaguered program. Thanks to those programs and an improving economy, private capital has begun to return to the LIHTC program; but the program could be further improved with some specific legislative changes to extend the rates and increase program flexibility.
NMHC/NAA urge Congress to protect the LIHTC program as it considers comprehensive tax reform and resist calls to eliminate it in search of a more simplified tax code. We also would encourage lawmakers to make the following targeted changes to improve the program’s effectiveness:
Although there are no comprehensive tax reform proposals currently moving through Congress, many members would like to see a simpler tax code that features lower rates and fewer credits and deductions. NMHC/NAA are working diligently to remind policymakers that the LIHTC program is one of the nation’s most successful housing programs and should not be curtailed as part of any tax reform package.
With regard to the proposals to enhance the LIHTC’s effectiveness, the Senate Finance Committee in August 2012 approved legislation to extend expiring tax provisions (S. 3521, the Family and Business Tax Cut Certainty Act of 2012) that includes language that would extend the 9 percent credit to LIHTC properties financed by credits allocated prior to January 1, 2014. The properties may be placed in service following that date so long as the credits are allocated during the applicable period. While the House has not yet moved its own version of tax extenders legislation, congressional action is likely during the lame-duck session set to convene in mid-November. Finally, it is noteworthy that on December 14, 2011, Representatives Pat Tiberi (R-Ohio) and Richard Neal (D-Mass.) and Senators Maria Cantwell (D-Wash.) and Olympia Snowe (R-Maine) introduced NMHC/NAA-backed legislation (H.R. 3661 / S. 1989) to make permanent the 9 percent and 4 percent credit amounts described above.
There has been no legislative action to address the income averaging proposal made in President Obama’s FY 2013 budget.
Last Updated: November 2012
News summaries on the LIHTC programfrom NMHC's Update newsletter.
Tools for Practitioners
Regulations, research and other LIHTC resources for affordable housing professionals.