The federal government used to build its own public housing. However, the government banned public housing construction in 1968 and began demolishing many of its buildings in the 1990s.
While the direct construction went away, the need for new units did not. The National Low Income Housing Coalition published in its 2015 report that one out of every four renter households is extremely low income (“ELI”). ELI households are those with incomes at or below 30% of area median income.
Recognizing the need for additional affordable housing, Congress developed a strategy to entice private developers to build such housing. Cognizant that developers would not pursue these projects when market-rate developments would offer higher returns, Congress included an incentive in the form of a tax credit. The National Council of State Housing Agencies (NCSHA) states nearly 3 million apartments for low-income households have been built because of the Low Income Housing Tax Credit (LIHTC). It estimates that approximately 100,000 units are added to the inventory annually.
Low Income Housing Tax Credits
The tax credits to which a developer is entitled are based on multiple factors including the investment made by the developer, the percentage of low-income units created, the type of project, and whether the project is funded by any tax-exempt private activity bonds.
Claiming the Credits
Following construction or rehabilitation and lease-up of a building, the developer submits a “placed-in-service” certificate showing it has complied with its application and project agreement. The certificate typically includes information on qualified costs incurred, the percentage of units reserved for low-income qualified tenants, and constructions agreements.
If the certificate is approved, the developer is issued IRS Form 8609. The credits can then be claimed on the federal tax return. The credit is a dollar-for-dollar reduction in federal income tax liability.
Types of Low Income Housing Projects
A common misconception is that affordable housing is required to be new construction. The LIHTC can be used for:
- New construction
- Acquisition and rehabilitation
- Rehabilitation of a property already owned by a developer.
Affordable Housing Development Tax Implications
The low-income housing tax credit program is an option for real estate professionals seeking to develop a rental property. The tax credit will reduce Federal income taxes or can be sold for equity, reducing the debt needed to develop a project.
If developing affordable housing is part of your real estate game plan, don’t go it alone! A real estate CPA can help you devise effective tax strategies around the Low Income Housing Tax Credit program. Contact The Real Estate Tax Guy at [email protected] or 201.655.7411.