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Low-Income Housing Tax Credit (LIHTC) program was created by Congress
in 1986 to provide an incentive for the private sector to invest in
affordable housing. The program is based on Section 42 of the Internal
Revenue Code, and is administered by the state housing agency.
The LIHTC can
be used to offset the cost of acquisition, substantial rehabilitation,
or new construction of rental housing to be occupied by low-income
residents.
Federal housing
tax credits are awarded to developers of qualified projects in turn
for a commitment to offer a lower rental rate for at least 15 years.
The credits are used to offset an individual’s or corporation’s
federal tax liability. Developers then sell these credits to investors
to raise capital (or equity) for their projects. This reduces the
debt that the developer would otherwise have to borrow.
Provided the
property maintains compliance with the program requirements, investors
receive a dollar-for-dollar credit against their federal tax liability
each year for a period of 10 years. The amount of the annual credit
is based on the amount invested in the housing.
Each state is
awarded a certain amount of housing credit it can award to developers,
based on the state’s population. These credits are awarded
annually through a competitive review process, which takes into
account the state’s affordable housing goals.
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