The Low Income Housing Tax Credit (LIHTC) is a subsidized housing program that provides an incentive for developers and investors to build and fix up housing for low income households in the United States. This program provides a tax credit for those who build affordable housing.
What is the LIHTC?
The LIHTC is the government’s largest initiative to create low-income housing. It was created by the Tax Reform Act of 1986 and has provided $8 billion in tax credits to developers and investors. The act enables state and local LIHTC agencies to give incentives for new affordable housing.
These funds can be used to purchase new or existing housing, construct new low income housing, and/or rehabilitate (or fix up) existing low income housing units.
The LIHTC requires that a certain amount of housing be available to low-income individuals and families. Specifically, the housing must include 20% of tenants with income that is 50% below the AMI, 40% of tenants with 60% of their income below the AMI, and no more than 60% of tenants with incomes greater than 80% of the AMI.
Benefits of the LIHTC
The Low Income Housing Tax Credit gives developers a good reason to increase the amount of affordable housing in the United States. Naturally, developers want to build properties that will earn them a lot of money in return. The LIHTC helps give them a reason to price their rents more affordably.
In housing developments that receive LIHTC benefits, applicants must qualify by meeting the Area Media Income (AMI) limits; rent is set at 30% of the income associated with the dwelling and also by the family size.
Low income renters benefit greatly from the increase of affordable housing in the United States. When this program works as intended, it provides more affordable homes for the families that need them.
Drawbacks of the LIHTC
There is an ongoing housing crisis for affordable housing in the U.S. particularly low-income housing. There are more than 8 million low-income housing units/homes attributed to LIHTC, and the median income is less than $18,200. The pandemic has further increased the need for low-income housing.
The LIHTC does not have a far enough reach so states supplement the gap with their own low-income housing programs. However, not all states have a program, and in some, it’s been a struggle to establish one.
The program is complicated and difficult to understand. In fact, the accounting firm Novogradac publishes an annual guide to the credit and that guide is over 1,400 pages long! It is a bureaucratic nightmare, requiring developers and governments to jump through many hoops to obtain and disburse these funds.
Additionally, the rent restrictions under the Tax Reform Act are meant to last 30 years. However, after the government reclaims the tax credits within the first 15 years, landlords are eligible to request to exit the program.
This means that the affordable housing built under the LIHTC program is only affordable for about 15 years before rents begin to rise again. This means that it isn’t a permanent or even long-lasting solution to the affordable housing crisis.
In fact, the CATO Institute has found that the LIHTC is one of the most wasteful and inefficient government programs that has been established.
One of the more inefficient programs is the Low Income Housing Tax Credit (LIHTC). The program provides $9 billion a year in tax credits to support housing construction… but studies suggest that investors, developers, and financial companies gain most of the benefits. The program has complex administration, is prone to abuse, and produces costly low‐income housing.The CATO Institute
In fact, a Missouri auditor found that only 35 cents out of every tax dollar was actually used to build low income housing. This low rate of return and the short timeframe during which the unit must be priced affordably make this program significantly less helpful to low income Americans.
Can LIHTC Help Me?
The Low Income Housing Tax Credit helps create more affordable housing in the United States but it does not help low income renters directly. It’s an indirect source of low income assistance.
The LIHTC is essentially the source of low-income housing. If you feel strongly about voicing your support for expanding this program and others like it, you can find and reach out to your state representatives and senators at house.gov.
The LIHTC is managed by the Department of Housing and Urban Development (HUD) which also lists state offices where you can apply for low-income housing. Another good resource for low-income housing programs is usa.gov. The Low Income Relief team has also written several posts about low-income housing topics.
FAQs about LIHTC
We get a lot of questions about low-income housing. Here are some of the questions we are asked most often.
What qualifies as low income?
HUD sets the income limits that determine eligibility for subsidized low-income housing. The limits depend on where you live and your area’s AMI. The AMI is determined for metropolitan areas, parts of metropolitan areas, and by county (those outside metropolitan areas). Candidates applying for housing assistance programs (eg, Section 8 Housing programs) must have an income equal to or less than the AMI benchmark. Income limits range from 50%-80% of a region’s AMI.
Annual gross income is just a part of the application process. Other factors include whether there is an elderly individual applying if there is someone with a disability, the applicant’s citizenship or immigration status, and references.
How can I apply for low-income housing?
You can get more information about applying for low-income housing at the HUD website here. If you don’t see an office close to you, consider contacting one of the other state offices that can help you to locate one close to you.
What is Section 8 housing?
Outside of low-income housing developments created by the LIHTC, many landlords participate in the government’s subsidized housing assistance program called the Housing Choice Voucher Program Section 8. You can get more specific information about housing in your area by contacting your closest HUD office here.