What Is Lihtc Tax Credit Program

The federal government provides tax credits to state and territory governments. State housing agencies then lend affordable rental housing projects to private developers through a competitive process. Developers typically sell the loans to private investors for financing. Once the residential project is commissioned (essentially made available to tenants), investors can claim the LIHTC over a period of 10 years. [61] Chris Edwards and Vanessa Brown Calder, « Low‐Income Housing Tax Credit: Expensive, Complex, and Corruption‐Prone, » Cato Institute, Tax and Budget Bulletin, No. 79, November 13, 2017, www.cato.org/publications/tax-budget-bulletin/low-income-housing-tax-credit-costly-complex-corruption-prone. [15] Connecticut Housing Finance Authority, « Low-Income Housing Tax Credit Compliance Manual, » May 2019, 48, spectrumlihtc.com/wp-content/uploads/CT-LIHTC-Compliance-Manual-2019.pdf. The maximum tax credit for a new assisted living project is $500,000. The maximum for each other project is $1,000,000. However, DHCD may choose to provide more than $1 million in loans (up to a maximum of $1.3 million in loans) to large-scale projects with neighborhood implications. Applications for grants over $1 million will be reviewed on a case-by-case basis if the proponent is able to demonstrate the potential impact of the project and if the DHCD has sufficient funding to make a larger allocation. DHCD expects a sponsor who receives a grant of more than $1 million (up to a maximum of $1.3 million) to apply for reduced grant amounts from the department. The maximum allowable base per unit for tax credits is $250,000 per supported unit for projects in the Boston metropolitan area and $200,000 per supported unit for projects outside the Boston metropolitan area.

The DHCD will limit the eligible base in the conservation reserve to $175,000 per unit supported. Administrative improvements at the State level could be made to reduce the risk of fraud; However, these also have their price. For example, California spent $9.6 million on the California Tax Credit Allocation Committee for 2019, for the sole purpose of administering the LIHTC program. [64] The subprime mortgage crisis of 2007-2008 and the ensuing recession resulted in a loss of revenue for businesses, reducing the need for many businesses to offset their taxable income with non-repayable credits. The last 15 years are called « extended useful life ». The extended useful life leads to several compliance changes. While owners will continue to be required to maintain affordability during the extended period of use, they will no longer be required to report affordability compliance to the IRS and their state HFA, and will no longer risk having their tax credits recovered. [37] In the 2010s, as the rest of the economy recovered, the LIHTC market also recovered. With the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, the corporate tax rate was lowered from 35% to 21%. As businesses owed less corporate tax each year, there was concern that the need for tax credits would decrease, which would reduce investment in LIHTC-funded projects. The 9% loan is granted through a competitive issuance process by the states` HFAs.

States develop a Qualified Allocation Plan (QAP) that details the minimum solvency requirements as well as the scoring criteria for comparing project applications. The specific criteria of each state are unique. However, the majority of HFAs want to encourage several general goals, such as. B the number of affordable housing units, the cost thresholds of the project and the quality of the housing. [39] Developers of affordable rental subdivisions claim tax credits from the DHCD. When they get the loan, the promoters (for-profit or non-profit) look for investors to finance the development of the business. Intermediaries (called syndicators) act as a bridge between investors and projects and often bundle investors` money into equity funds. In exchange for development funds, investors receive a stream of tax credits.

Projects may be eligible for two types of credits: a 9% credit or a 4% credit.* Investors can claim tax credits for 10 years. For example, if an investor is willing to pay $0.75/tax credit, a project eligible for $500,000 in annual credits would receive $3,750,000 ($500,000 credit x 10 years x $0.75) in equity. Both loans offer housing with the same affordability requirements. [38] The 4% loan is not provided competitively by the federal government and has no impact on the annual allocation of a state HFA. In other words, all projects that meet the 4% criteria will receive the credit. The 4% credit is available to projects that already receive the majority of their financing through tax-exempt bonds or other government grants, as well as for the acquisition, renovation and conversion of existing structures into affordable housing. HUD collects LIHTC data at the property and tenant level. The LIHTC database, created by HUD and open to the public since 1997, contains information on 48,672 projects and 3.23 million housing units commissioned between 1987 and 2018. While some program data has been provided from a variety of sources, the HUD database is the only comprehensive national source of information on the size, composition of units, and location of individual projects. HuD also collects information on certain demographic and economic characteristics of households living in LIHTC properties from the state housing finance agencies that administer the LIHTC program. This page provides access to real estate and tenant data, as well as data on skilled census tracts and challenging development areas reported by HUD. For example, the Arizona Qualified Allocation Plan 2020 included criteria « to provide tax credits to projects that serve low-income populations — including families with children, the homeless, veterans, and the elderly — to develop and promote energy- and water-efficient housing, to develop rental housing in locations reasonably close to frequent bus transportation or public transit to Large capacity, == References == [48] Proponents apply for government HFAs with their proposed projects, and tax credits are granted based on their compliance with their state`s AQP criteria.

Tax credits cannot be redeemed until the project has been completed and commissioned. As a result, proponents typically enter into contracts with investors who provide immediate financing for the project in exchange for the anticipated claimed tax credits. Often, these transactions are facilitated by « syndicators » who specialize in connecting developers with investors for a fee. * 4% tax credits are issued by MassHousing (formerly Massachusetts Housing Finance Agency) in conjunction with MassHousing`s tax-exempt bond financing. The Massachusetts Development Finance Agency (MDFA) also issues 4% tax credits in conjunction with tax-exempt bonds. The LIHTC Act originally stipulated that the IRS would periodically reset the credit percentages shown to maintain the present value of the 10-year tax credit stream at 70% or 30% of the qualified base. However, since 2008, Congress has determined that the minimum loan rate for the 70% cash value loan should be at least 9%, regardless of prevailing interest rates. Thus, in a low interest rate environment, the present value of loans claimed over 10 years will exceed 70% of the qualified base. A tax credit is a provision that reduces the final tax bill by one taxpayer dollar to dollar.

A tax credit is different from deductions and exemptions that reduce taxable income, not directly from the taxpayer`s tax bill. A Cato Institute article published the same year shows that the increased risk mentioned by the GAO was justified and lists several cases of fraud under the LIHTC program. This is made possible by the LIHTC`s opaque and discretionary allocation process, where projects are awarded to developers who inflate or manufacture contractor fees, thereby increasing the price of the LIHTC they receive from the government. .