What is the Low Income Housing Tax Credit?

The Low Income Housing Tax Credit was created in 1986 as part of a major reform of the tax code. The idea was to relieve the federal government’s burden by encouraging private investors to fund affordable housing developments. The primary goal was to create new housing without the government having to build and manage it. One way to do this was to create mixed buildings where market rate tenants and income-restricted tenants would live side by side. In addition to create a practical financial structure for owners, some housing advocates saw this as a way to break up patterns of housing segregation.

Currently, a developer proposing a new LIHTC project has to meet, at a minimum, one of two guidelines: at least 20 percent of the units are reserved for households making less than half of the area median income; or at least 40 percent of the units are for households making no more than 60 percent of the area median income. (These numbers are based on gross income.) The owner can also choose to reserve all of the units for low-income usage, as may be the case with nonprofit housing developers, who are a significant part of the LIHTC home movement.

Winning LIHTC approval is a competitive process that is managed at the state level: a developer may be more likely to get tax credits if the project satisfies specific local priorities (such as helping a key under-served neighborhood), has extra features designed to support a particular population (such as the mentally ill or the formerly homeless), or sets aside more than the minimum number of units for lower-income households.

Various local agencies, in conjunction with developers, then invite applications for the available homes. The families selected for the income-qualified units will generally pay rent equal to 30 percent of their income. (Other units will be made available at market rates.)

Supporters of the LIHTC point out that the program creates jobs, mainly in construction, and shifts the risk of building new housing to the private market; tax credits are only awarded once the homes are built and occupied. If buildings are found to violate program rules, tax credits will not only be taken back, the developer may be disqualified from future LIHTC participation.