Exploring Low-Income Housing Tax Credits [Part 1]

Learn about the origin of the LIHTC program and how it works in the first part of this educational series.

The Low-Income Housing Tax Credit, or LIHTC, is a program created by the federal government that incentivizes developers to create low-income housing by offering a 10-year credit on their federal income taxes. It isn’t particularly hard to understand that without some kind of incentive, developers are not generally inclined to forgo the profits they would have naturally made by offering a property at below-market rent. It is with that sentiment in mind that this program was developed to encourage the construction and maintenance of affordable units around the country. The LIHTC can be utilized for acquisition and rehabilitation, new construction, and rehabilitation of a currently owned property. Additionally, these credits can also be utilized to preserve existing affordable housing (without any rehabilitation) in certain situations.

How Does The LIHTC Program Work?

The LIHTC program was initially created as part of the 1986 Tax Reform Act. The LIHTC is not a tax deduction (which reduces a borrower’s taxable income), rather, the credit provides a tax discount of a specific dollar amount, which can be applied to the investor or developer’s tax bill. In order for the developer to continue to take advantage of the tax credit, the property must be kept in compliance.

While the LIHTC program is technically federal in nature, in practice, the program is administered and maintained at the state level. Individual state Housing Finance Authorities (HFAs) are typically responsible for approving LIHTCs to investors and developers on a by-project basis. Each state has what’s called a Qualified Allocation Plan (QAP), which details its exact LIHTC project requirements, which are typically more strict than the overall requirements outlined in the federal program. Some states even have specific preferences towards one type of affordable housing transaction, such as acquisition and rehabilitation or new construction, and may prefer to allocate credits to one of these areas before others.

Competition for the LIHTC Program

Based on a state’s population along with a pre-determined multiplier, the federal government allocates a specific amount of credits to each state. Because of this, the amount of credits each state can get varies significantly. That said, competition for the LIHTC program can be intense— as there are a fixed number of credits per year and a significant number of developers/investors who want them. While it may seem chaotic at first, the scarcity of credits actually further promotes the goal of the program, since developers are even more incentivized to make their projects particularly affordable in order to compete against others vying for the same credits.