September 20, 2005 — One of the most important tools available for developing affordable rental housing and revitalizing communities is part of the 1986 Tax Reform Act, the Low-Income Housing Tax Credit (LIHTC) program.  The dollar-for-dollar reduction in the federal tax liability, or tax credit, creates an incentive for investing in affordable housing developments.  With the devastation caused by Hurricane Katrina, the development of affordable housing will be vital for the states affected.

Tax credits are allocated annually by the Internal Revenue Service ( IRS ) to each state based on the number of residents.  The state allocating agencies are responsible for determining which projects the tax credits should be allocated to as well as the amount.  Developers of affordable housing are awarded tax credits after submitting detailed proposals, which must meet certain eligibility requirements.  Developers generally utilize syndicators, banks and investment partnerships, who provide the primary source of equity financing for tax credit projects.  Syndicators recruit investors in LIHTC projects who can use the credits to reduce their tax liability, dollar-for-dollar, each year for ten years. 

LIHTC amounts are calculated based on the cost of the building, the portion of the project that low-income households occupy and the applicable percentage as set monthly by the IRS .  The cost of acquiring, rehabilitating and/or constructing a building constitutes a building’s eligible basis.  The eligible basis excludes the cost of land, obtaining permanent financing, rent reserves, syndication and marketing.  The portion of the eligible basis attributable to affordable-housing units is the building’s qualified basis.   The LIHTC is determined by multiplying the applicable percentage by the qualified basis, capped at the amount of credits allocated.

Tax credits may be claimed by investors for each of the ten years as long as a minimum percentage of the project’s units are rented to low-income tenants at restricted rents for a 15-year compliance period.  States are required to monitor all tax credit projects for compliance with these restrictions and for their physical condition, and must report any noncompliance to the IRS .  As a result of Hurricane Katrina, the IRS has allowed owners of affordable housing tax credit projects to provide temporary housing in vacant units to individuals displaced by the hurricane damage.  Through December 30, 2006 , the temporary housing of these individuals in affordable-housing units, without regard to their income, will not cause the owners to lose affordable-housing housing tax credits.

The LIHTC program has been very successful in providing housing to low-income households.  Each year, the program produces more than 130,000 affordable apartments and leverages about $6 billion of private investment.  It is expected that the effects of Hurricane Katrina with further boost the development of affordable housing tax credit projects. 

For more information on LIHTC's, please contact Kevin Johnson or Debbie Quarry at 215-564-1900 .

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