If you are a real estate developer or looking to start investing in real estate, there are a number of tax credits out there that can be beneficial to you. Tax credits are incentives that allow taxpayers to subtract specific amounts of money from what they owe the state or federal government. Certain tax credits, like the child tax credit and the adoption credit, help families with children. Other tax credits, like the earned income credit, help low-earning individuals.
The low-income housing tax credit incentivizes real estate developers to build housing in low-income areas. Discover what the low-income housing tax credit is and whether you qualify for this tax refund.
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What Are Low-Income Housing Tax Credits?
The low-income housing tax credit is a dollar-for-dollar tax credit program designed to help developers looking to break ground in low-income areas. It is important to understand that low-income housing is different than affordable housing, which is for families who spend 30% or more of their income on housing.
The LIHTC policy was written into the Tax Reform Act of 1986 as an incentive for housing developers to construct or renovate housing for low-income taxpayers. This tax credit also incentivizes investors who put money into low-income housing projects. Meant to stimulate economic growth for low-income individuals and communities, this tax credit creates affordable communities with lower rents by offering tax incentives to the property owners.
There are a variety of properties that can qualify for the LIHTC. Developers of apartment buildings, single-family homes, townhomes, and duplexes may qualify for this tax credit, which is broken down into two buckets. A 9% credit can be used if a project won’t have any additional credits or government subsidies tied to it. The other type of credit is 4% and can be used in conjunction with other tax credits. Low-income housing tax credits can be applied over a 10 year period, helping to cover almost the entire taxable expense of a property.
Low Income Housing Credit Eligibility
In order to become eligible for the low-income housing credit, it’s important to be aware of basic qualifications as well as a general understanding of your household income. Single persons and households with or without children qualify. According to Affordable Housing Online, affordable housing programs often refer to a household as a “family,” but that simply means that one or more persons live in the dwelling. Unlike Section 8 and Public Housing, no citizenship requirement must be met for LIHTC properties.
Low Income Housing Credit Allocation
The LIHTC is one of the largest government-funded incentive programs for low-income housing. While the government wants more low-income housing to be built, there is a limit to the funds they can allocate to these kinds of projects each year. The amount allocated changes, but the process it goes through is the same. Below is a closer look at how low-income housing credits are allocated.
- Congress allocates a certain amount of funding to go towards low-income housing. In 2018, they allocated $2.765 million or $2.40 per capita, whichever was larger. There has since been a 12.5% increase in what Congress is offering so as to guarantee funding to states with lower populations.
- The state allocates these credits to developers based on qualified plans. Priority is placed on plans that cater to low-income households and affordable housing.
- Developers sell tax credits to investors, who contribute equity to projects. Most often, investors play a passive role in these development projects, receiving tax benefits and allocating funds as needed.
How Do I Apply to a Low Income Housing Tax Credit Program?
The application process for the low-income housing tax credit is facilitated by a state authority. To apply, you must include an estimate of the project and comply with conditions known as “set-asides.” These are based on the income of the tenants who will live in the low-income housing you provide. More specifically, your tenants must pass an income test, as well as a gross rent test. Below is a breakdown of the “set-asides” required to apply for a LIHTC.
- 20% of the units must be occupied by tenants with an income of 50% or less of the area median income adjusted for family size (AMI).
- 40% of the units are occupied by tenants who have an income of 60% or less of AMI.
- 40% of the units are occupied by tenants who have an income of 60% or less of AMI and no units are occupied by tenants with an income that is more than 80% of AMI.
From there, credits are determined based on the state population. Applications are scrutinized under the Qualified Allocation Plan (QAP), where most credits are awarded to projects during allocation rounds on a competitive basis. This helps ensure each state meets housing goals. As mentioned, not all projects have to go through this competitive process. Some projects that are financed by tax-exempt bonds may also qualify for the LIHTC. The state agency responsible for awarding the bonds determines which projects are eligible for this tax credit program.
If you are interested in developing property in low-income areas, you may benefit from this tax credit. Research your state’s policy to see if you qualify.
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