Low- Income Housing Tax Credit:
Affordable housing development is more than a real estate project; it is a careful balance of financing, tax strategy, community need, and long-term compliance. At the center of many successful affordable housing projects is one of the most valuable tax incentives available: the Low-Income Housing Tax Credit, or LIHTC.
When properly structured, LIHTC can help turn a challenging development into a financially viable project while supporting much- needed affordable rental housing.
The key is understanding how the credit works before the project begins and maintaining compliance long after the credits are claimed.
Understanding the Low-Income Housing Tax Credit (LIHTC)
The Low-Income Housing Tax Credit (LIHTC), under Internal Revenue Code Section 42, is a federal income tax credit that supports the development and preservation of affordable rental housing by allowing an annual credit equal to the applicable percentage of a building’s qualified basis during a 10-year credit period.
How the Credit Works
LIHTC provides eligible property owners with federal tax credits over a 10-year period in exchange for meeting long-term affordability requirements. The amount of credit available is generally based on a property's qualified basis, which takes into account development costs and the percentage of units dedicated to low-income tenants.
Qualification Requirements
To qualify, a project must reserve a specified percentage of units for income-qualified tenants and comply with rent restrictions. Projects typically qualify under one of several occupancy tests that ensure housing remains affordable for lower-income households.
The Two Main Credit Types
The program generally offers two credit structures:
- A higher-credit option, commonly referred to as the "9% credit," typically used for new construction projects that are not federally subsidized.
- A lower-credit option, commonly known as the "4% credit," often used for acquisition, rehabilitation, and tax-exempt bond-financed projects.
Recent legislation established minimum credit floors that provide greater certainty for qualifying developments.
Additional Incentives
Certain projects located in designated high-need areas may qualify for a basis boost, increasing the amount of eligible costs used to calculate the credit. Tax-exempt bond-financed projects may also access LIHTC benefits through specialized financing rules.
Compliance Is Critical
While the tax benefits can be substantial, LIHTC projects are subject to extensive compliance requirements. Property owners must maintain affordability standards, verify tenant income eligibility, meet rent restrictions, and satisfy reporting obligations throughout a lengthy compliance period. Failure to comply can result in the recapture of previously claimed credits.
Why LIHTC Matters
The LIHTC program has played a significant role in expanding the nation's affordable housing supply by encouraging private investment in housing developments that serve low- and moderate-income families. For developers, investors, and housing organizations, understanding the program's qualification and compliance requirements is essential to maximizing available tax benefits while maintaining long-term project success.
The Low-Income Housing Tax Credit program offers significant opportunities, but success depends on proper planning, structuring, and ongoing compliance.
Whether you're developing, investing in, financing, or managing affordable housing, our team can help you navigate the tax, accounting, and compliance requirements associated with the Low-Income Housing Tax Credit program with confidence. Please contact us to discuss your project. We are here and happy to help.
