A Guide to Low-Income Housing Tax Credits

How do LIHTCs Work?

The LIHTC process typically involves the following steps:  

1. Project Development: Developers identify suitable properties and prepare project plans.
2. Application: Developers submit applications to state housing finance agencies (HFAs) for LIHTC Allocation.
3. Allocation: HFAs review applications and award LIHTCs based on established criteria.
4. Financing: Developers secure financing from banks, investors, or other sources.
5. Construction or Rehabilitation: Developers construct or rehabilitate affordable housing units.
6. Compliance: Developers must comply with LIHTC requirements throughout the project’s term. 

Tax Credits Allocation 

The LIHTC provides tax credits to developers for the construction, acquisition, and rehabilitation of affordable housing units. State HFAs allocate these credits based on a state's population size.  

The program offers two types of credits: 

1. 9% Credits: These competitive credits are the most common form of credit in the LIHTC program. They can be used with new construction or acquisition/rehabilitation developments.
2. 4% Credits: These credits are for federally subsidized developments with tax-exempt bonds. These bonds are typically referred to as non-competitive and are awarded “as of right” if the tax-exempt bond funding meets the requirements of the LIHTC program. Like the 9% Credit, these credits can be used for new construction or acquisition/rehabilitation developments that are funded with tax-exempt bonds, provided they meet the requirements of the LIHTC program.  

Compliance Period 

Developers receiving credits must comply with specific requirements for a minimum of 15 years, known as the compliance period. They must then continue to meet affordability standards for an additional 15 years, known as the extended-use period. 

Rent Restrictions 

To qualify for LIHTCs, a portion of the project's units must be rent-restricted and occupied by income-eligible tenants. Typically, at least 20% of the units must be occupied by households earning no more than 50% of the Area Median Income (AMI), at least 40% of the units must be occupied by households earning no more than 60% of the AMI, or at least 40% of the units must be occupied by households earning no more than an average of 60%, allowing these households to earn as much as 80% of the AMI. 

Calculating Tax Credits 

The amount of LIHTC allocated to a project is based on the qualified basis, which is the eligible development costs multiplied by the applicable fraction (the proportion of units/square footage attributed to affordable units) multiplied by a potential basis boost of up to 130% if certain conditions are met. This amount is multiplied by the applicable credit rate (9% or 4%) to determine the annual tax credit amount.