Housing
The Low Income Housing Tax Credit (LIHTC; usually pronounced "lie-tech") is a dollar-for-dollar tax credit in the United States for affordable housing investments. It was developed under the Tax Reform Act of 1986 (TRA86) that provides incentives for the utilization of private equity in the creation of affordable housing aimed at low-income Americans. LIHTC accounts for almost 90% of all affordable rental housing developed in the United States today. The credits are also generally called Section 42 credits in reference to the applicable section of the Internal Revenue Code. The tax credits are more attractive than tax deductions as they provide a dollar-for-dollar reduction in a taxpayer's federal income tax, where as a tax deduction only offers a reduction in taxable income. The "passive loss rules" and similar tax changes made by TRA86 greatly reduced the value of tax credits and deductions to individual taxpayers. As a result, nearly all investors in LIHTC projects are corporations.
TRA86 adversely affected many investment incentives for rental housing while leaving incentives for home ownership. Since low-income people are more likely to live in rental housing than in owner-occupied housing, this would have decreased the new stock of housing accessible to them. The Low Income Housing Tax Credit was hastily combined with TRA86 to provide some balance and encourage investment in multifamily housing for the poor. Over the subsequent 20 years, it has become an quite efficient tool for managing this housing. The LIHTC program has helped meet a crucial affordable housing shortage by stimulating the production or rehabilitation of almost 2 million affordable homes.
As of 2006, as much as 30 to 40% of all new multifamily construction has inherited a subsidy under the program. The estimated cost to the federal Treasury in FY05 was $3.85 billion. The annual allocations under the program increased importantly in 2001 when Congress increased the state allocations by 40%.
A keyity of tax credit projects also receive subsidies from other government sources. These additional subsidies, which can include development grants and loans at below-market interest rates from local and state governments, can account for one third of total capital subsidies. Thirty-nine percent of low-income tenants also receive rental assistance in the form of tenant-based housing vouchers or project-based certificates from HUD's Section 8 program or project based Rental Assistance in USDA, Rural Housing Service Section 515 Rural Rental Housing communities. Though usual, these are not necessarily present in a project that benefits from the LIHTC.
To launch the LIHTC program, Enterprise Community Partners solicited corporations to invest in a $50 million account to take advantage of the new program. Fannie Mae was the very first to do so in 1987. Their first development was Wood Street Usuals, a YMCA turned homeless shelter, in Pittsburgh.
Applying for Low Income Housing
The first step in the procedure is for a project owner to submit an application to a state authority, which will consider the application competitively. The application will include guesses of the expected cost of the project and a commitment to comply with either of the following conditions, called "set-asides":
* At least 20% or more of the residential units in the development are both rent restricted and occupied by individuals whose income is 50% or less of the place median gross income.
* At least 40% or more of the residential units in the development are both rent restricted and occupied by individuals whose income is 60% or less of the place median gross income.
Generally, the project owner will agree to a higher percentage of low paid usage than these minimums, up to 100%. Low income tenants can be charged a maximum rent of 30% of the maximum eligible income, which is 60% of the place's median income adjusted for household size as determined by HUD. There are no limits on the rents that can be charged to tenants who are not low paid but live in the same project.