About the Low-Income Housing Tax Credit Program
The LIHTC program effectively uses tax policy to help develop affordable rental housing for low and very low-income families. Originally part of the Tax Reform Act of 1986, the LIHTC program leverages private capital and investor equity to support the development of new and rehabilitated affordable rental housing. The credits are competitively priced. In general, state governments can adapt the LIHTC program to meet their housing needs under broad federal guidelines. In addition, the private sector carries all development and marketing risk and enforces strong oversight and accountability.
The program addresses the continued need for affordable housing with a low foreclosure risk. Working-class families, seniors, the homeless, and underserved urban and rural communities benefit from housing developed with the LIHTC program. LIHTC properties have an average vacancy rate of 4.2 percent, compared to 10.6 percent in the overall rental market. Foreclosures have occurred in less than 1 percent of all LIHTC properties since 1986, better than all other classes of real estate.
The LIHTC program uses a pay-for-performance policy with ongoing risk to the investors. Investors only get to claim and keep the tax credits if their units are built, leased and maintained as affordable housing throughout a 15-year compliance period. Many states enforce a 15 year extended-use period to require that properties stay affordable beyond the first 15 years. Developers provide guaranties throughout the 15-year compliance period, including operating deficit and tax credit guaranties. States use a competitive process to award developers with credits.
The program creates jobs for small businesses. When developing affordable rental with support from the LIHTC program, architects, plumbers, electricians, carpenters and other building specialists benefit. Property managers, maintenance workers, service providers and others benefit when the housing is occupied.
How the Low-Income Housing Tax Credit Program Works
The federal government funds the LIHTC program.
- The U.S. Department of the Treasury issues tax credits to state governments and requires that LIHTC-funded housing stays affordable for at least 30 years.
- In 2009, for example, each state received a maximum of $2.30 per resident.
Individual states largely control what housing gets built.
- States control the type and location of the housing built and other relevant characteristics to best serve low and very low-income residents.
Developers apply for competitive tax credits.
- State agencies write regulations (called “qualified allocation plans” or “QAPs”) describing how developers will be selected and open the competition for credits.
- The agencies review and rate the developers’ applications and award the tax credit allocations to the most qualified developer(s).
Developers get funds toward construction.
- Enterprise and other companies (called “fund managers” or “syndicators”) create funds to pool investor capital.
- Syndicators then use these funds to purchase the tax credits from the developer in exchange for an equity stake in the housing development.
- With capital from investors, developers can limit the amount of money they borrow to fund construction, which reduces the developers’ debt and keeps rent affordable.
- Low-income families rent an affordable home.
- LIHTC properties can only be rented to families whose income is at or less than 60 percent of the area median income.
- Tenants’ rent payments are capped at 30 percent of the AMI based on bedroom size minus the utility allowance if applicable.
- Investors purchase a 10-year tax credit.
- The equity stake in the housing developments that investors receive provides competitive yields.
- Investors help to revitalize the communities in which they work and live.
Advocacy & Urgency
The 2007-2009 recession and financial crisis sharply reduced investment in the program. To maintain the LIHTC investment market and project pipeline, congress needs to enact legislation to increase private investment interest and broaden the investor base.
To advocate for LIHTC legislative proposals, Enterprise helped to establish and lead the Affordable Rental Housing A.C.T.I.O.N. (A Call to Invest in Our Neighborhoods) Campaign, a national grassroots coalition.
Read our LIHTC policy information to learn more.
LIHTC is Key to Innovative HUD Pilot
HUD’s ambitious new Rental Assistance Demonstration (RAD) employs Low-Income Housing Tax Credits to preserve and improve the nation’s waning stock of affordable rental housing.