global Tax Developers, Have You Considered the LIHTC Program to Fund Construction? April 25, 2022 Attention real estate developers…are you aware of benefits under the Low-Income Housing Tax Credit (LIHTC) program? You’ll want to read up on how it can benefit you. Are you a real estate developer? You may be eligible for LIHTCs to fund construction costs. See if you qualify below. The basics The Low-Income Housing Tax Credit (LIHTC) program is the federal government’s primary tool for encouraging the development and rehabilitation of affordable rental housing. The program gives State and local LIHTC allocating agencies the authority to issue LIHTCs to developers to offset the costs of acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households. These units are subject to rent restrictions such that the maximum permissible gross rent, including an allowance for utilities, must be less than 30% of imputed income based on an area’s median income (AMI). Typically, developers sell their LIHTCs to outside investors in exchange for equity financing to cash flow the project. The LIHTCs give investors a dollar-for-dollar reduction in their federal tax liability in exchange for providing financing to develop affordable rental housing. Investors' equity contribution subsidizes low-income housing development, thus allowing some units to rent at below-market rates. What qualifies? To qualify for the credit, a project must meet the requirements of a qualified low-income project. Generally, project sponsors/developers (project sponsors) are required to set aside at least 40 percent of the units for renters earning no more than 60 percent of the AMI (the 40/60 test) or 20 percent of the units for renters earning 50 percent or less of the AMI (the 20/50 test), as elected by the property owner. In addition, LIHTC owners cannot discriminate against voucher families and must accept Section 8 voucher tenants. The process of allocating, awarding, and the claiming the LIHTC begins at the federal level with each state receiving an annual LIHTC allocation according to its population, with a minimum small population state allocation ($3,245,625 in 2021). The credit allocation for 2021 and 2022 was increased for buildings located in any qualified disaster zone. A state’s Qualified Allocation Plan sets the state’s initiatives of its affordable housing program, shaping the type and location of housing built. Calculating the LIHTC There are two types of credits available to developers: the 4 percent credit and 9 percent credit and calculated as 4 percent or 9 percent of the project's qualified basis, a figure calculated from the gross construction costs of the project's affordable units (excluding land). The 4% tax credit (30% subsidy) is for the acquisition of existing buildings for rehabilitation and new construction financed by tax-exempt bonds. The 9% tax credit (70% subsidy) is usually for new construction and substantial rehabilitation without federal subsidies. Taking the credit Once the housing project is placed in service and the required occupancy rate has been achieved (essentially, made available to tenants), investors can claim the LIHTCs in equal amounts over a 10-year period. Building owners must make a one-time submission of Form 8609 to the Low-Income Housing Credit Unit of the IRS no later than the due date of their first tax return. A separate Form 8609 must be issued for each building in a multiple building project and can be used to obtain a housing credit allocation from the housing credit agency and certify certain information. Generally, a state income tax credit is treated for federal income tax purposes as a reduction or potential reduction in the original recipient's state tax liability to the extent that the taxpayer can only apply the credit against a current or future tax liability. State tax credits are generally recognized over a 5-year period. Compliance LIHTC properties must commit to at least 30 years of affordability, and subject to a 15-year “compliance period,” monitored by state housing agencies. This is the period where the tax credits that have been given to developers can be taken away or “re-captured” if the property fails to comply with LIHTC regulations. KLR works with developers who have taken advantage of the LIHTC program. For more information, contact us.
