Low Income Housing Tax Credit

Tax credit is absolutely better than tax deduction. Let’s say your tax bracket is 35%. $1,000 tax deduction reduces your taxable income by $1,000 and subsequently reduces your income tax by $350. $1,000 tax credit directly reduces your income tax by $1,000.

Federal, state and local government offer variety of tax credits. One of them is low income housing tax credit (LIHTC) for investor to develop, acquire and rehabilitate housing for low income tenants. Why does government give investor free money? Well, it is a win-win scenario. The government lacks the resource to provide affordable housing, and it needs private investor to help the government increasing the supply of affordable housing. On the other side, without tax credit, providing housing for low income tenants may not be economically feasible for investor.

LIHTC program was enacted in 1986 based on Section 42 of the Internal Revenue Code. Tax credits have been awarded to developers whose project meets requirements as follow:

• Residential rental property
• At least 20% of the units must be rent restricted and occupied by households with incomes no more than 50% of the HUD-determined area median income OR at least 40% of the units must be rent restricted and occupied by households with incomes no more than 60% of the HUD-determined area median income
• The rent, including utilities, do not exceed HUD specified limit
• 30 years or longer operation under rent and income restriction

The developers can then sell the credit to investors and investors will receive tax credit over 10 years period. Investors need to maintain compliance with applicable rules, and if the rules are violated, investors may have to pay back the credits taken, or unable to apply for future credit.

Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved