Low-income housing tax credit

Definition

The low-income housing tax credit (LIHTC) is a federal tax incentive program aimed at encouraging the construction and rehabilitation of affordable rental housing for low-income individuals and families. By providing tax credits to developers, the LIHTC helps to offset costs and make projects financially viable, ultimately increasing the availability of affordable housing options in various communities.

5 Must Know Facts For Your Next Test

1. LIHTC was created under the Tax Reform Act of 1986 and has become the primary vehicle for creating affordable rental housing in the United States.
2. Developers can receive tax credits over a 10-year period, with the amount based on the cost of the project and the number of units designated for low-income tenants.
3. To qualify for LIHTC, at least 20% of units must be rented to households earning 50% or less of the area median income, or at least 40% must be rented to households earning 60% or less.
4. The program is administered by state housing finance agencies, which allocate credits based on local housing needs and priorities.
5. LIHTC has played a crucial role in alleviating housing shortages by incentivizing private investment in affordable housing developments across the country.

Review Questions

• How does the low-income housing tax credit program incentivize developers to create affordable housing?
  • The low-income housing tax credit program incentivizes developers by providing them with federal tax credits that can significantly reduce their tax liability over a ten-year period. This financial benefit helps offset construction or rehabilitation costs, making projects more attractive and feasible. As a result, developers are more likely to invest in creating affordable rental units, ultimately contributing to an increase in available affordable housing for low-income families.
• Discuss the criteria that determine eligibility for receiving low-income housing tax credits and why these criteria are important.
  • Eligibility for low-income housing tax credits is determined by specific criteria, including income limits for tenants and the proportion of units designated for low-income residents. For instance, projects must ensure that either 20% of units are occupied by households earning 50% or less of the area median income, or 40% are occupied by those earning 60% or less. These criteria are crucial because they ensure that the program effectively targets assistance to those most in need, helping to alleviate poverty and promote economic diversity within communities.
• Evaluate the long-term impact of the low-income housing tax credit on affordable housing supply and community development.
  • The long-term impact of the low-income housing tax credit on affordable housing supply and community development has been significant. By leveraging private investment through tax incentives, LIHTC has facilitated the creation of millions of affordable rental units across the United States. This influx of affordable housing not only addresses critical shortages but also contributes to revitalizing neighborhoods and fostering economic growth. However, challenges remain, such as ensuring that these developments maintain affordability over time and effectively integrate into surrounding communities to avoid issues like gentrification.

Related terms

Affordable Housing: Housing that is economically accessible to individuals and families with low to moderate incomes, ensuring that no more than a specified percentage of their income is spent on housing costs.

Tax Credit: A provision that allows taxpayers to subtract a certain amount from the taxes they owe, effectively reducing their overall tax liability.

Rental Assistance: Programs designed to help low-income renters afford housing by subsidizing their rent or providing direct financial assistance.