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Low-Income Housing Tax Credit
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Overview of LIHTC
Prior to 1986, substantial financial incentives existed for owners of low-income housing. These incentives included the deduction of construction period interest and taxes, accelerated depreciation and amortization of building costs. However, Congress eventually determined that investment benefits to owners and investors in real estate were overly generous. The outcome of this process was the Tax Reform Act of 1986, which resulted in the loss of many of these incentives.
At the same time that Congress was eliminating real estate investment incentives, they were also trying to create sufficient incentives for investment in low-income housing. The end result was the creation of the Low-income Housing Tax Credit (LIHTC) program which is included as Section 42 of the Internal Revenue Code. The low-income housing tax credit is an incentive program created to encourage the construction or rehabilitation of buildings for low-income tenants. It provides a dollar-for-dollar credit that can be used to reduce your federal taxes. These tax benefits can also be used by developers to attract investors who commit their dollars to a project in return for a share of the tax credits and other benefits. The tax credit program differs from previous incentives in that the program does not provide deductions to the investor's income but provides, instead, credits which can be used against the investor's bottom-line tax liability. Another departure is that the program is administered by the U.S. Department of the Treasury and is not a part of the Department of Housing and Urban Development (HUD) as are most other federal housing programs.
Section 42 stipulates that the credit will be allocated on the state level and requires each state to designate an agency to administer the program. This agency is called the "allocating agency". The Washington State Housing Finance Commission (the "Commission") is the designated allocating agency for the state of Washington. States can only allocate credits within their state boundaries, and the Commission is the only agency in Washington authorized to issue credits. The laws governing the program impose many requirements on owners which the Commission must administer and monitor. The allocating agency also has the ability to develop additional requirements beyond the federal code for administering the program. State guidelines may be more restrictive than federal guidelines.
Generally, each state may allocate a specified amount of credit (annual authority) per year to qualified projects in the state. The amount of annual authority is based primarily on the per capita population of the state. This means a state may allocate an amount equal to $1.95 per resident per year. For instance, if the state population for a given year were 5,000,000, the state credit available for that year would be $9,750,000 (5,000,000 X $1.95). In addition to the per capita credit authority amount, the state may gain additional authority from other sources. These sources include credits forfeited by projects which failed to complete and excess credits from a completed project. The state may also receive additional credit from a National Pool composed of the unused credit of other states.
10/30/2008