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Low-Income Housing Tax Credit (LIHTC): What You Need to Know

As the affordable housing crisis deepens across the United States, the Low-Income Housing Tax Credit (LIHTC) remains a critical tool in financing the development and preservation of affordable rental housing. Whether you're a developer, investor, policymaker, or someone interested in affordable housing solutions, understanding how the LIHTC program works is essential.

What is the Low-Income Housing Tax Credit (LIHTC)?

Established by the Tax Reform Act of 1986, the Low-Income Housing Tax Credit is a federal tax incentive administered by the Internal Revenue Service (IRS) to encourage the construction and rehabilitation of affordable rental housing for low- to moderate-income households.

Each year, the IRS allocates tax credits to state housing agencies based on population. These agencies then distribute the credits to qualified affordable housing developers through a competitive application process.

How Does LIHTC Work?

The LIHTC program provides a dollar-for-dollar reduction in federal tax liability for investors in qualified affordable housing projects. There are two types of credits:

  • 9% credit: Typically used for new construction without other federal subsidies.
  • 4% credit: Generally used for the acquisition of existing buildings or projects with additional federal subsidies.

Developers usually partner with private investors, who provide equity in exchange for the tax credits, thus reducing the amount of debt needed to finance the project. This structure helps ensure that rents remain affordable for low-income tenants.

LIHTC Eligibility and Compliance

To qualify for LIHTC, developers must commit to keeping units affordable for a minimum of 15 years (with an extended 15-year compliance period), and they must meet certain income and rent restrictions:

  • At least 20% of the units must be rented to households earning 50% or less of the Area Median Income (AMI), or
  • At least 40% of the units must be rented to households earning 60% or less of AMI.

Recent changes have introduced the Average Income Test, allowing units to serve a broader range of incomes (up to 80% AMI) as long as the average income remains at or below 60% AMI.

Benefits of LIHTC

  • Increased Affordable Housing Stock: Since its inception, LIHTC has helped finance over 3 million affordable housing units nationwide.
  • Public-Private Partnerships: Encourages collaboration between government and private sector investors.
  • Community Revitalization: Often used to rehabilitate distressed or underutilized properties, boosting neighborhood stability and growth.

Challenges and Criticism

While effective, the program is not without its challenges:

  • Complexity: The application and compliance process is intricate and can be a barrier for smaller developers.
  • Insufficient Supply: Despite its impact, LIHTC alone cannot meet the overwhelming demand for affordable housing.
  • Location Bias: Some studies suggest developments are disproportionately located in lower-income or segregated areas.

Recent Updates and Legislative Proposals

Lawmakers have proposed several bills to expand and enhance the LIHTC program, such as the Affordable Housing Credit Improvement Act. These efforts aim to increase funding, simplify compliance, and expand income eligibility to reach more families.

The Low-Income Housing Tax Credit remains one of the most effective and scalable tools to address America’s affordable housing shortage. By leveraging public-private partnerships and incentivizing long-term affordability, LIHTC continues to play a vital role in providing safe, stable housing for millions of Americans.