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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
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