Creation of the Low Income Housing Tax Credit

The Low Income Housing Tax Credit (LIHTC) program was created by Section 42 of the Tax Reform Act of 1986. The program leverages the expenditure of public money in the form of uncollected tax revenue with private equity investment to fund low income housing development. Each state receives tax credits annually, based on a formula of $1.25 per capita. It is then up to the relevant state agency to develop its own application process for allocating the credits within Internal Revenue Code guidelines. Developers submit project plan applications for credits, and then generally sell them to investors, either directly or through a syndicator. The tax credits are distributed over a ten-year period.

The LIHTC is currently the most important program through which the federal government encourages the development of affordable rental housing. It is a unique program within the context of the federal government’s historical supply-side intervention in the housing market. The LIHTC encourages private investors to provide equity for the development of low income housing in return for federal tax credits-a dollar for dollar reduction in tax liability. In the years since the program’s inception an entire industry has grown up around the syndication of the tax credits and the development and financing of LIHTC projects.

The number of units that have been built through the program is impressive. Estimates range from a U.S. Department of Housing and Urban Development (HUD) study figure of 500,000 units completed between 1987-1994(1) to a National Council of State Housing Agencies (NCSHA) report of almost 900,000 units created from the program’s inception to 1997.(2) State housing agencies receive more than $3 billion in tax credits per year to allocate to low income rental housing projects.(3)

LIHTC projects must remain in compliance with program regulations for a minimum of 15 years (many states require a longer lock-in period) or the tax credits may be revoked by the IRS. A project is considered in compliance if 20% or more of the residential units are rent-restricted (gross rent does not exceed 30% of the HUD-established income limitation) and occupants have incomes 50% or less of the area median gross income, or 40% or more of the units are rent-restricted and occupants have incomes 60% or less of the area median gross income. Projects qualify for one of three credits under the program. New building or substantial rehabilitation without federal subsidy qualifies for a 9% tax credit, new building or substantial rehabilitation with federal subsidy qualifies for a 4% credit, and there is a 4% credit for acquiring an existing building which will use additional credits for substantial rehabilitation.

1 Cummings, Jean L. and Denise DiPasquale. 1998. Building Affordable Rental Housing: An Analysis of the Low Income Housing Tax Credit, City Research, Inc.
2 Ernst & Young. 1997. The Low Income Housing Tax Credit: The First Decade. E&Y Kenneth Leventhal Real Estate Group. (prepared for the National Council of State Housing Agencies) This figure is significantly higher than most other estimates.
3 Abt Associates. 1996. Development and Analysis of the National Low Income Housing Tax Credit Database. U.S. Department of Housing and Urban Development Office of Policy Development and Research.