What is a Low-Income Housing Tax Credit?

The low-income housing tax credit is a United States federal subsidy program that was enacted in 1986. The aim of this initiative is to provide incentives for the development of housing for low-income individuals in every state. This is achieved by granting tax credits to developers, which they can sell to investors. The low income housing tax credit program requires the joint efforts of the Internal Revenue Service (IRS), the Department of Housing and Urban Development (HUD), and agencies from each state.

Although the low-income housing tax credit is a federal program, it is one that is executed with the assistance of state authorities, such as housing finance agencies. The process begins when the IRS provides a state authority with credits. It is then that authority’s responsibility to distribute the credits to developers who meet the qualifications. Credits are transferred from the federal government to state authorities each year. A state authority has two years to disburse the credits before they will be returned to the federal government for redistribution.

Each state’s authority is allowed to develop a distribution plan, but it must comply with certain federal guidelines. First, the state must prioritize distribution to developers with projects that are for individuals in the lowest income brackets. Second, priority must be given to projects that are designed to keep costs low for the longest periods of time. Third, 10 percent of the credits granted to a state must be reserved for projects outlined by non-profit organizations.

In addition to these distribution rules, there are also eligibility rules for those who wish to obtain a low-income housing tax credit disbursement. The federal government has outlined two income threshold requirements. One, known as the 20-50 rule, requires rent restrictions and 20 percent occupancy by individuals whose income is at least 50 percent below the area median income, which is determined by HUD. The second threshold requirement, known as the 40-60 rule, requires rent restrictions and occupancy of 40 percent of the units by individuals whose income is at least 60 percent below the area median income. A project must meet one or the other of these standards.

The restricted rate for low income individuals must take utility rates into consideration. Furthermore, for a developer to receive credits, he must enter into a written agreement that states that the property will maintain these standards for at least 30 years. Once the developer receives the credits, he can sell them to investors. The investors can then use the low-income housing tax credit allotment they receive to reduce their tax liability for ten years, if the property remains compliant.