What Is a Tax Credit Property? Definition, How to Qualify, and Benefits

Tax Credit Properties: A Key Solution to Affordable Housing

While people look for places to live in the housing market in today’s world, affordable housing is getting more and more difficult to obtain in the United States for most Americans. Coming to the solution to the vexing problem of where people are living today, tax credit apartments are a great answer to provide good, decent, low-cost housing for low income families and individuals. In this article, I embark on a study on what a tax credit property is, how it actually operates in the housing market for these people, and its effects are when they are instituted in communities in the US.

What Are Tax Credit Properties?

Tax credit properties are those that take advantage of the federal Low-Income Housing Tax Credit, otherwise known as the LIHTC programme. The LIHTC is a provision of the Tax Reform Act of 1986, passed under the Ronald Reagan administration. It was created to entice private investors and developers to provide affordable housing.

The Impact of the LIHTC Program

As such, since its inception, the LIHTC programme has created a sizable number of affordable apartments for low-income earners. The US Department of Housing and Urban Development reports that between 1987 and 2020, the programme generated 3.44 million affordable rental homes for low-income earners.

How Tax Credit Properties Work

The LIHTC programme is a unique partnership between federal, state and local governments, private capital investors/syndicators, and private developers. This is how it works:

The federal government allocates tax credits to state housing agencies based on population.

State agencies determine local affordable housing needs and set priorities.

Developers submit proposals for housing projects that align with these priorities.

If approved, the developers usually sell the tax credits to investors to raise money.

After the construction of said units and the wait for occupancy, the property owner may take the tax credits over the following 10-year span.

In return, the site must keep rents affordable for at least 15 years, a period that is often extended to 30 years or more.

Eligibility and Rent Restrictions

To receive the tax credit, property owners must make a certain amount and rent out their homes for the right price:

Income Requirements (one of the following):

At least 20 per cent of the units are occupied by renters earning less than 50 per cent of area median income (AMI)

At least 40% of units having renters with income at or below 60 per cent of AMI.

At least 40 per cent of units house renters with an income no higher than 60 per cent of AMI and no unit houses renters who earn more than 80 per cent of AMI.

Rent Restrictions:

Gross rents cannot exceed 30 per cent of either 50 per cent or 60 per cent of AMI, depending on a project’s designation.

Types of Eligible Properties

The LIHTC program is versatile, applying to various housing types, including:

Apartment buildings

Single-family homes

Townhouses

Duplexes

Benefits of Tax Credit Properties

For Tenants:

Access to quality, affordable housing

Reduced rent payments, allowing for more spending on other necessities or savings

Opportunity to live in potentially better locations with access to jobs and schools

For Communities:

Increased availability of affordable housing

Potential for community revitalization and job creation

Economic stimulus as residents have more disposable income

For Investors and Developers:

Tax credits that can offset federal tax liabilities

Opportunity to contribute to social good while receiving financial benefits

Challenges and Criticisms

Despite its successes, the LIHTC program faces some criticisms:

Cost to the government: The program is estimated to cost $13.5 billion annually.

Efficiency issues: Some claim that taxpayers’ money ends up paying too many middlemen lining their pockets rather than helping to build housing.

Location issues: Many have criticised tax credit properties for being located in areas where people have fewer economic opportunities.

Complexity: The program’s regulations can be challenging to navigate, especially for smaller developers.

Long-term affordability: There are concerns about maintaining affordability after the compliance period ends.

Who Invests in Tax Credit Properties?

Typically, the major investors in LIHTC projects are large corporations, particularly banks, with considerable income tax liability. They’re the ones who can make the best use of the credits generated by the programme, which are non-refundable.

The Future of Affordable Housing

Given the growing shortage of affordable-housing opportunities, tax credit properties in the future are likely to make up an even larger percentage of the housing stock. The Low-Income Housing Tax Credit programme has not been without problems, but it has enabled the construction and preservation of millions of homes that serve the needs of affordable housing. Ongoing proposals for restructuring the programme to make it more efficient and effective could accomplish that much more in the years ahead, presenting the hope of better opportunities for low-income renters and neighbourhoods across America.

Conclusion

Tax credit properties are novel ways to harness private capital to serve an important public end: providing more affordable housing to Americans. The LIHTC programme, while unpopular among some, is certainly an asset that we must continue to learn from – and subsidise – as we continue to struggle to provide adequate housing to all who can afford it.