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What Is a Tax Credit Apartment?

Last updated 03/15/2024 by

Lacey Stark

Edited by

Fact checked by

Summary:
A tax credit apartment or property encompasses affordable rental housing for low-income populations. This typically includes apartment buildings or housing projects where owners, developers, or landlords can claim tax credits as long as some or all of the property units are allocated to low-income tenants at reduced rents. This is made possible through the federal Low-Income Housing Tax Credit (LIHTC) program, which is designed to encourage the development of affordable housing in exchange for a federal tax subsidy.
Affordable housing, particularly for low-income households, is always a challenge. Affordable housing is generally defined as dwellings where the occupant is paying no more than 30% of gross income for housing costs, including utilities.
By this standard, there is a serious shortage in this country of affordable housing for many low-income families. This shortage is confirmed through a report by Harvard University’s State of the Nation’s Housing, which found that more than one in seven households pays more than half of their wages on housing.
The Low-Income Housing Tax Credit (LIHTC) program is meant to address this ongoing problem. To achieve this, the program incentivizes companies that have substantial income tax liabilities to take advantage of tax credits to build or rehabilitate affordable rental housing projects. Read on to learn more about the LIHTC program, what exactly it is, how it works, and what it does to provide affordable housing to low-income households.

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What are tax credit apartments and the LIHTC?

The Low-Income Housing Tax Credit (LIHTC) program is a resource for creating affordable housing in the United States. Those affordable units developed are called tax credit apartments, although they could also be a house, duplex, or townhome instead. And, unfortunately, it’s pretty easy to see why additional affordable housing is necessary.
Created by the Tax Reform Act of 1986, the LIHTC program gives state and local LIHTC-allocating agencies the equivalent of about $8 billion in annual budget authority to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households, according to the U.S. Department of Housing and Urban Development (HUD).

How the tax credits work

In a nutshell, the low-income housing tax credit gives taxpayers a reduction in their tax liability in exchange for investing in long-term affordable rental housing. Investors are often financial institutions that have a sufficient income tax liability, and therefore want to take advantage of the tax incentive the LIHTC program offers.
The federal government issues the tax credits to state housing finance agencies which are responsible for disbursing the credits. The state housing finance agencies then award the credits to qualifying developers and owners who acquire, rehabilitate, or build low-income housing based on strict requirements (more on that below).
Ultimately, the program aims to provide families in need with less expensive dwelling options. And to encourage the continuous development and rehabilitation of affordable properties, the government offers tax incentives to companies and financial institutions that invest in, build, and own these properties.
If you’ve recently come across an affordable housing option, be sure to compare what home loans you qualify for before applying.

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How much is the tax credit?

The annual credit claimed by a taxpayer equals a credit percentage multiplied by the project’s qualified basis. The percentage for new construction or substantial rehabilitation is roughly 9%. That’s higher than for properties purchased for minor rehabilitation or for projects funded using tax-exempt bonds, which is about 4%.
The qualified basis is equal to the fraction of the cost of the housing project rented to tenants meeting the income test. Oftentimes the landlords or developers aim to lease 100% of the spaces to qualifying tenants to maximize the tax break.
Additionally, sometimes state housing finance agencies allocate enhanced tax credits to qualified projects in areas that have a greater need for low-cost rental housing.

How owners and developers qualify for the LIHTC program

Despite the name, a tax credit apartment isn’t just for apartments. According to the Urban-Brookings Tax Policy Center (TPC), many different types of housing can qualify for the low-income housing tax credit, including apartments, townhouses, duplexes, and single-family homes. But the owners or developers must meet the income test and gross rent test for tenants.
Income requirements for the tax credit are as follows:
  1. A minimum of 20% of the project’s apartments must be occupied by tenants with an average income of 50% or less of the area median income (AMI), adjusted for family size.
  2. At least 40% of the units are meant for tenants with an income of 60% or less of the AMI.
  3. And at least 40% of the units are occupied by tenants with income averaging no more than 60% of the AMI, and no apartments should be occupied by tenants with income greater than 80% of the AMI.
The gross rent test requires that rents do not exceed 30% of either 50% or 60% of the AMI, depending on the share of tax credit rental units in the project. If LIHTC projects do not comply with the income and rent tests for 15 years, the credits will be revoked. At this point, an extended compliance period of 30 years in total is generally imposed.

Pros and cons of the Low-Income Housing Tax Credit program

While the LIHTC program is meant to be beneficial to both low-income tenants and the private investors and developers that provide affordable housing, there are some elements of the program that aren’t ideal.
A study by the Urban Institute outlines some of the program’s successes and challenges.
WEIGH THE SUCCESSES AND CHALLENGES
Here is a list of the benefits and drawbacks to consider.
Successes
  • Helps to increase affordable housing for families in need through new construction and preserving and rehabilitating existing spaces.
  • The use of tax credits removes some of the burden on state and federal governments by incentivizing private investors.
  • Has increased low-cost housing units by more than 110,000 per year since the mid-90s.
  • The tax credits are beneficial to landlords and investors who participate in the program.
Challenges
  • The low-rent apartments only have to stay low-rent during the required compliance periods, which means they may not remain affordable after that period.
  • The program structure tends to lead to a concentration of units in poorer areas rather than more affluent areas where residents could take advantage of better opportunities for jobs and schools.
  • Regulatory barriers and direct community opposition can impede affordable housing construction in some areas.
  • The program may not be as economically efficient as programs like housing vouchers due to the complex, time-consuming, and competitive process of allocating and awarding the tax credit system.
  • LIHTC can “exacerbate racial segregation, a repeated legal problem for affordable rental housing developments over the years.”
IMPORTANT! In 2015, the U.S. Supreme Court found the Texas Department of Housing and Community Affairs guilty of promoting continued racial segregation through its pattern of funding LIHTC units. A disproportionate number of units were awarded in black inner-city areas versus white suburban communities.

FAQs

How do I get an apartment voucher?

An apartment voucher, otherwise known as a housing choice voucher, is a federal government program to help very low-income families, the elderly, and the disabled afford decent, safe, and sanitary housing in the private market. The participant is free to choose any housing that meets the requirements of the program and is not limited to units located in subsidized housing projects.
Housing choice vouchers are administered locally by public housing agencies (PHAs). The PHAs receive federal funds from the U.S. Department of Housing and Urban Development to administer the voucher program. Eligibility for a housing voucher is determined by the PHA and, in general, the family’s income may not exceed 50% of the median AMI for the area in which the family chooses to live.

Do you get credit for rent on taxes?

Unfortunately, there are no provisions for deducting the money you spend on rental housing from your taxes. Rent is what you pay to live in a property owned by someone else. The person who owns the property is eligible for tax breaks, including (if applicable) credits for providing a certain percentage of affordable rental housing units. To date, the IRS does not permit a tax deduction for paying rent.

Key Takeaways

  • A tax credit property is typically an apartment building or housing project that meets government standards of appropriate low-income housing.
  • The Low-Income Housing Tax Credit (LIHTC) program, part of the Tax Reform Act of 1986, offers a tax incentive to investors, developers, and landlords who invest in affordable rental housing in low-income communities in the form of income tax credits.
  • The purpose of the LIHTC program is to create quality, affordable housing for low-income residents (in the form of lower rent payments) through projects financed by private developers, owners, and investors.
  • In order to be LIHTC eligible for the federal subsidy, owners and private investors must meet the precise income test and gross rent test for the rental properties, as outlined in the LIHTC program, prior to receiving the tax credit.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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