Affordable Housing Tax Credit

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The section 42 LIHTC Tax Credit Program is a program for individuals and families making moderate or lower incomes. Congress created the Program in 1986 as part of the Tax Reform Act and is administered by the Internal Revenue Service.

BENEFITS FOR RESIDENTS

The benefits for the residents of these properties with this particular financing are that the apartments are newly constructed or substantially renovated with rents usually lower than the market rate. The rents are no higher than 30% of the area median income as published by HUD, often resulting in rents lower than other comparable apartments

BENEFITS AND INCENTIVES TO OWNERS

Owners are offered reductions in their tax liability in exchange for offering quality housing at these fixed rents. To receive these reductions, the owner(s) must annually certify that the residents are qualified under the Program requirements and are paying the correct amount of rent.

DIFFERENCES FROM OTHER HOUSING PROGRAMS

This Program is not a subsidized housing program or Section 8 housing. All residents are responsible for the full amount of rent each month. The rental amount is NOT based on your individual household income, rather on the pre-set income limits in the area. Some apartments within a particular apartment community may not be part of this program. The rent for these apartments will often be higher.

BACKGROUND ON LIHTC

The Low-Income Housing Tax Credit (LIHTC) is the most important resource for creating affordable housing in the United States today in introducing the revised national database that provides a comprehensive project-level look at LIHTC production. The database, created by HUD and now available to the public, contains information on nearly 20,700 projects and more than 1,041,000 housing units placed in service between 1987 and 2001. The LIHTC program was designed to stimulate development of affordable housing for persons of low to moderate income. It was created by the enactment of Section 42 of the Internal Revenue Code, part of the Tax Reform Act of 1986.

This change to the IRS tax code disallowed many traditional tax shelters for high-end investors. In return, it is designed to encourage affordable housing development by offering alternative tax relief in the form of tax credits for the development and operation of low- to moderate-income housing. Furthermore, rather than tying the tax benefit to the operating loss on a building, it was now tied to the continuation of housing low-income and moderate-income residents.

The LIHTC Program is a financing “vehicle” that is regulated by the IRS. Investor’s purchase tax credits from the owner who has been allocated a specified number of tax credits by its state government. The purchase of these tax credits increases the owner’s down payment on the project. This in turn lowers the mortgage and financing costs, thereby resulting in lower “affordable” rents for the resident. The owner agrees to offer affordable rental housing to households with an annual gross income of 60% or less of county median income. They also agree to maintain housing for no less than 30 years.

It is important to differentiate the tax credit program from the federal housing subsidy programs. The Section 42 tax credit program itself does not provide deep subsidy as does the Section 8 program and cannot be considered a housing program for households qualifying under the very low income guidelines of other federal programs. One of the primary benefits of the program is that it offers residents rent ceilings.

Created by the Tax Reform Act of 1986, the LIHTC program has been recently amended to give States the equivalent of nearly $5 billion in annual budget authority to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households. Although some data about the program have been made available by various sources, HUD’s database is the only complete national source of information on the size, unit mix, and location of individual projects. With the continued support of the national LIHTC database, HUD hopes to enable researchers to learn more about the effects of the tax credit program.

An average of about 1,300 projects and 90,000 units were placed in service in each year of the 1995 to 2001 period, according to Updating the Low-Income Housing Tax Credit Database: Projects Placed in Service through 2001, a HUD companion report to the database.

REVISIONS TO THE LIHTC DATABASE

In late 1996, additional efforts were made to improve the coverage of the LIHTC database for earlier years of the program. These efforts resulted in the addition of 1,989 projects containing 67,056 units to the database.

In January 2001, data for projects placed in service between 1995 and 1998 were added. These projects are described in the report updating the National Low-Income Housing Tax Credit Database. Except for some additional geocoding, there were no revisions made to data for projects placed in service from 1987 through 1994.

In May 2002, data for projects placed in service through 1999 were added. These also included 319 projects and 25,000 units placed in service in 1998 and 44 projects and nearly 5,000 units placed in service in 1997 that were not included in the previous update. Projects from all years (1987 through 1999) were geocoded to 1990 and 2000 Census geography. For details see the report updating the National Low-Income Housing Tax Credit Database: Projects Placed in Service Through 1999.

In March 2003, data for projects placed in service through 2000 were added. These also included 44 projects and 2,123 units placed in service in 1998 and 76 projects and 4,865 units placed in service in 1999 that were not included in the previous update. For details see the report updating the National Low-Income Housing Tax Credit Database: Projects Placed in Service Through 2000.

In May 2004, data for projects placed in service through 2001 were added. These also included 132 projects and 11,832 units placed in service between 1995 and 2000 that were not included in the previous updates.

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