[1] The program was created under the Tax Reform Act of 1986 (TRA86) to incentivize the use of private equity in developing affordable housing.
[8] As of 2012, the LIHTC program accounted for approximately 90% of all newly created affordable rental housing in the United States.
[9] In 2010, the President's Economic Recovery Advisory Board (PERAB) estimated that the LIHTC program would cost the federal government $61 billion (an average of about $6 billion per year) in lost tax revenue from participating corporations from 2008-2017, as well as noting that some experts believe that vouchers would more cost-effectively help low income households.
Simultaneously, an investor will be found that will make a capital contribution to the partnership or limited liability company that owns the project in exchange for being allocated the entity's LIHTCs over a ten-year period.
The program's structure as part of the tax code ensures that private investors bear the financial burden if properties are not successful.
This pay-for-performance accountability has driven private sector discipline to the LIHTC program, resulting in a foreclosure rate of less than 0.1%, far less than that of comparable market-rate properties.
As a permanent part of the tax code, the LIHTC program necessitates public-private partnerships, and has leveraged more than $75 billion in private equity investment for the creation of affordable rental housing.
It also encourages developers to offer benefits that are better than the established minimums when competing against other projects (e.g., charging lower rents, or maintaining the low income requirements for a longer number of years, will often improve a project's rank in the competitive process; it is important to check the particular state's QAP and application to see how it makes these judgments).
The credits are subject to "recapture" if the project fails to comply with the requirements of Section 42 of the Tax Code during the 15-year compliance period.
For this reason, many developers agree to make 100% of the units low income in order to maximize the potential tax credits.
Projects for (1) new construction and (2) the cost of rehabilitating an existing building, if not funded by tax-exempt bonds, can receive a maximum annual tax credit allocation based on a rate which is generally 4% of any acquired building's basis, and 9% of the project's eligible basis in new construction or rehabilitation.
The cost of projects financed in whole or in part with tax-exempt bonds, are eligible for a credit of approximately 3% to 4% annually, and, in most cases, fixed at 4% starting in 2021.
Rules that provided a lower credit rate for "below-market federal loans" were repealed in 2008, applicable to buildings placed in service after July 30, 2008.
An investor wishing to exit the partnership before the end of the compliance period may post a surety bond to avoid credit recapture.
All designations also contain a continuing education component to ensure certified professionals maintain their knowledge and keep abreast of the LIHTC Program changes.
Under law, the only investors eligible for Low-Income Housing Tax Credit (LIHTC) investments are large C corporations.
[13] As the financial markets deteriorated in the second half of 2008, so did the C corporations’ profits that are typically offset by tax credits, like the LIHTC.
The American Recovery and Reinvestment Act of 2009 created two gap-financing programs to help tax credit properties, which were ready to begin construction, get additional financing.
[21] [22] First introduced in 2016 by Senator Maria Cantwell (D-WA), Orrin Hatch (R-UT), and Chuck Schumer (D-NY), the AHCIA contains provisions to modify the Low-Income Housing Tax Credit.
Among the provisions are an increase in the LIHTC state allocation and credit bonuses for developments serving veterans, rural areas, native communities, and extremely low-income individuals.
The legislation would restore an expired 12.5% allocation increase to each state’s Housing Credit ceiling and reduce the proportion of tax-exempt private activity bond financing required for projects to earn four percent LIHTCs from 50% to 30%.
These provisions were derived from the Affordable Housing Credit Improvement Act, bipartisan legislation to expand and strengthen LIHTC.
The two LIHTC provisions included in the Tax Relief for American Families and Workers Act of 2024 would expire at the end of 2025 unless extended and are estimated to finance the production or preservation of over 200,000 new affordable rental homes.
[26] In 2010, the President's Economic Recovery Advisory Board (PERAB) estimated that the LIHTC program would cost the federal government $61 billion (an average of about $6 billion per year) in lost tax revenue from participating corporations from 2008-2017, as well as noting that experts believe that vouchers would more cost-effectively help low income households.
[27] A 2018 Urban Institute report criticized the program's lack of permanent affordability requirements and questioned whether it fully meets the needs of the poorest households.