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Read the Statute from the IRS Code, Sec. 42. Low-income housing credit.

History:

The Low Income Housing Tax Credit Program (LIHTC) was created by the Tax Reform Act of 1986 to help offset the loss of incentive provided by the 15 year depreciation for low income rental housing. It was the first (and only) production program to replace the Section 8 New Construction / Sub Rehab program terminated in the early 1980s.

Under the LIHTC, developers of rental housing must meet certain affordability tests:

1. one-fifth of the units must rent at 50 percent of area median income
2. or two-fifths at 60 percent of area median income

If the standards are met and approval is granted in advance of the project, investors receive a ten year stream of federal tax credits. The value of these credits is usually converted into equity in the project, thereby resulting in reduced debt and more affordable rents. In practice, many tax credit projects are undertaken with 100 percent of the units at 60 percent of median. The minimum affordability period is fifteen years.

Tax credits are allocated to developers and must be approved by the states, usually the state housing development or finance agency. Each state receives an annual allocation of $1.25 per capita. In addition, tax exempt multifamily bond issues also carry the credit with them outside of the cap. The $1.25 cap has not been adjusted since the program was created in 1986, but pending legislation would increase the state's allocation to $1.75 per resident and index it to inflation. Since demand for the housing credit outstrips supply by more than three to one, passage of the bill should greatly expand available resources for affordable housing.

States must reserve a minimum of 10 percent of the credits for nonprofit developers. The program is administered by the Internal Revenue Service within the Treasury Department. An average of 1,300 LIHTC projects and 56,000 units are placed in service each year. The average project size has increased over the years from 28 units in 1988 to 45 units in 1994.

Present Status

The LIHTC program has long operated under the threat of short-term "sunset" provisions. In fact, it has been suspended on several occasions while last minute extensions of program authority were approved by Congress. In 1993, Congress approved a permanent extension of the program. That was important to it's success because the value of the credits to a limited partner is based, in part, on the partner's confidence in the program's permanence. Many housing developers believed that the doubt and uncertainty caused the market value of the credit to be diminished, thereby reducing the level of housing subsidy eventually available to tenants. In fact, the price that investors now pay for the credits is twenty eight percent higher because permanence has attracted more investor competition.

In 1995, as part of the budget reconciliation process, Representative Bill Archer (R-TX), Chair of the House Ways and Means Committee, inserted a provision that would sunset the tax credit program after 1997. Representative Archer cited alleged abuses in the program and pointed to a current Government Accounting Office (GAO) study of the LIHTC. Despite overwhelming support for the program, much of it from Republican governors, the provision stayed in the bill. The reconciliation bill was vetoed by President Clinton, however, largely for reasons dealing with Medicare and Medicaid.

The LIHTC is now the only affordable rental housing production program available to developers. At a time when the gap is increasing between the number of poor families needing low cost rental housing and the number of affordable units. (In 1993, the American Housing Survey reported a shortage of six million low cost housing units) See our page on Cost vs. Value.

Program Benefits:

The LIHTC program has resulted in the development of nearly 800,000 rental housing units since its inception and actually accounts for a substantial portion of all multifamily development in the United States. The program operates on the popular decentralized model that sends control of the money to the states. A concept that both the Congress and HUD now favor. There is a very small staff at IRS that oversees the program with most administrative and monitoring responsibilities delegated to the states.

The LIHTC helps encourage private investment in affordable housing. Since it's inception, over $10 billion in private funds have been invested in LIHTC projects. More than $2 billion has been channeled into nonprofit developed housing.

Also see: Tax Credit FAQs