Considering a LIHTC Project, Read this First!
“Considering a LIHTC Project, Read this First!” by Kathy Keylor, CPA, MTax | Manager – Tax
The low-income housing tax credit (LIHTC) program is an indirect federal subsidy used to finance the construction and rehabilitation of low-income affordable rental housing. It was created as an incentive for private developers and investors to provide more low-income housing.
The LIHTC gives investors a dollar-for-dollar reduction in federal tax liability in exchange for providing financing to develop affordable rental housing. Investors receive tax credits paid annually, generally over 10 years.
The tax credit can be used to construct new or renovate existing rental buildings. State housing agencies administer the program and are guided by the IRS. State agencies review tax credit applications submitted by developers and then allocate the credits. Once an applicant secures a tax credit allocation, the developer must secure financing or equity from a private investor in exchange for the tax credits.
Once the project is completed, states must ensure that it meets the eligibility requirements. The LIHTC property must comply throughout the 15-year period or investors will be exposed to recapture of some of the credits. State housing agencies are responsible for monitoring LIHTC property owners by requiring them to certify annually that they are renting units to qualified low-income tenants.
Most developers choose to find tax credit investors, who provide cash for the development. The developer can either work with an investor who invests directly into a partnership and receives tax credits or work with a syndicator who acts as a broker between the developer and investor. Often, syndicators pool several projects into one LIHTC equity fund. Then, syndicators market the tax credits to investors who essentially invest in a piece of the syndicator’s fund.
Low-income housing tax credit projects require extensive paperwork and recordkeeping.
Contact your trusted advisor at Apple Growth Partners for more information on the tax credit and application process.