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Read Tax Credits For Dummies in the RHOL Investors Web. QUESTIONS & ANSWERS
Use these Quick Jumps or scroll down the page to read all the information. What is the Low Income Housing Tax Credit Program?
Who is eligible to use the program?
What are the requirements?
How much of a tax credit can I receive?
How do I calculate the tax credit amount?
How do I apply for tax credits?
How extensive is the LIHTC program?
Read the Statute on line.
The Low-Income Housing Tax Credit Program is a tool for private developers and non-profit entities to construct or rehabilitate affordable rental units. Federal and state tax credits may be used to obtain a dollar-for-dollar reduction in income tax liability for 10 years or to obtain equity for a project through syndication of the credits.
The program may be used with other state and federal programs to bridge the cost Vs value gap the now exists in building low-income housing and increase the feasibility of a rental project. Other programs contribute a combination of other rental subsidies under several Federal programs, including low-cost interim construction loans available from state, low-cost loans or grants.
The 1986 Tax Reform Act that created the tax credit now provides more than $3 billion in annual subsidy for low income rental housing development, providing a catalyst for private sector investment. The credit can he used for up to 50% (sometimes more) of the cost of building affordable housing.
Each state receives an allocation of $1.25 per resident, which is allocated to development projects through the State Housing Finance Agency, or another designated state office. The legislation provides for a 10 percent set-aside for projects sponsored by non-profit developers.
Update: Washington DC 11/1/97, Tax Credit Cap May Rise. Senators Al D'Amato (R-NY) and Bob Grahm (R-FL) have introduced legislation (S.1252) to increase the amount of low-income housing tax credits that states may allocate to developers of low-income housing. The $1.25 cap has not been adjusted since the program was created in 1986.
The pending leglislation 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.
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Who is eligible to use the program? Any individual, corporation, partnership, trust or other legal entity can utilize low-income housing tax credits if it has sufficient taxable income to be offset by the credits. Individuals may be limited in the amount of credit they are eligible to use (check with your tax accountant). Non-profit organizations who have an ownership interest in a low-income housing project or owners with minimal tax liability may also utilize the tax credit by raising equity for their project through the sale of the credits.
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What are the requirements? To qualify for a tax credit, owners must meet the following general guidelines in addition to other program requirements. See Section 42 of the Internal Revenue Code for specific eligibility. We have provided a direct link from the bottom of this page.
- The tax credit is available only for units rented to low- income occupants. This means that a project must have at least 20% of its units rented to households with incomes of 50% or less of area median income; or at least 40% of the units must be rented to households with incomes of 60% or less of area median income.
- Low-income rents, including utilities, are restricted based on the number of bedrooms in the unit and the area median income as established annually by HUD.
- The area median income varies in each county of each state. Area median income limits are adjusted for family size. Contact your state or local housing authority for these figures.
- The project must comply with the above rental restrictions for at least 18 years. Owners must recertify the income of low-income occupants each year.
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How much of a tax credit can I receive? The tax credit program encourages owners to buy and rehabilitate or construct housing for low-income persons by providing a federal tax credit of up to 9% of the acquisition, construction or rehabilitation costs (does not include cost of land) of the project. This credit applies only to housing costs for low-income units and can be claimed each year for 10 years. In addition, a State Low- Income Housing Tax Credit offers state tax credits often equal to a large percentage of the federal credit. Hawaii offers 30% of the Federal credit and waives their 4% state excise tax as well. Michigan provides additional incentives by providing low interest long term financing.
To receive a 9% federal tax credit, the low-income units must be either newly constructed or substantially rehabilitated (at least $3,000 per unit or 10% of the building's adjusted basis). Owners constructing new units with tax-exempt financing receive a 4% tax credit.
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How do I calculate the tax credit amount? To determine the amount of tax credit available to a project, multiply the tax credit rate by the project's qualified basis. "Qualified basis" means any depreciable costs (therefore land would not be included) multiplied by the project's percentage of low-income units. This tax credit amount reduces the owner's federal (and state) income taxes for 10 years, assuming both the property and the owner remain eligible.
For example, an owner obtains conventional financing and builds a 50-unit project; 10 units are occupied by low- income renters. Total development costs are $6.0 million, land costs are $1.2 million. Here's how to calculate the owner's 9% tax credit:
- $6.0M - $1.2M land value = $4.8 million (eligible basis)
- 10 low-income units out of 50 total units = 20%. $4.8M x 20% = $960,000 (qualified basis).
- $960,000 x 9% tax credit = $86,400 (annual federal tax credit which can be taken each year for 10 years)
- States offer additional incentives: In Hawaii add: $86,400 x 30% = $25,920 (annual state tax credit which can be taken each year for 10 years).
Your state Housing Development Authority is required to underwrite the project and award only the amount of credits required to make the project feasible.
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How do I apply for tax credits? Contact your State Housing Development Authority and ask for low-income housing tax credit application package. States usually provide staff assistance for the tax credit program and they review developers' proposals. The State Housing Authority approves the tax credit allocations for the acquisition and rehabilitation or construction of low-income housing tax credit projects.
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How extensive is the LIHTC program? 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.
More than half (54%) of the units were located in central cities. Of the remaining, 26% of the units were located in suburban (non-central city) metro areas and 19% in non-metro areas. From 1992 to 1994, LIHTC projects produced a substantial proportion of units (37 percent) in Difficult Development Areas or Qualified Census Tracts areas with challenging development conditions, such as low-income residents and high construction costs.
Read the actual Statute from the IRS Code, Sec. 42. Low-income housing credit. |