Low-Income Housing Tax Credit

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What is ‘Low-Income Housing Tax Credit’

The low-income housing tax credit is a tax incentive for housing developers to construct, purchase and renovate housing for low-income taxpayers.

BREAKING DOWN ‘Low-Income Housing Tax Credit’

The Low-Income Housing Tax Credit was written into the Tax Reform Act of 1986. There are specific qualifications residents must fulfill to benefit from these types of housing projects, including maximum income guidelines.

The Low-Income Housing Tax Credit also provides an income incentive for those who invest in low-income housing projects. It is intended to stimulate economic growth in this sector. Typically, the dwelling types that receive this credit are multi-family properties

There are two main types of credits available. The first is a 9 percent credit, which can only be used if the building project will have no other credits or government subsidies applied to it. The second type is a 4 percent credit, which can be used in conjunction with additional tax credits. These credits are applied over a ten-year period and can cover almost the entirety of the taxable expense for the building.

The tax credits are allocated to each state by the federal government. From there each state may choose which developers can take advantage of these credits for their housing projects. Not every developer or investor will be able to take advantage of this program as there are more applications than available permits issued for construction.

What is Low-Income Housing

Low-income housing is any housing project or residential building that rents units out to tenants who qualify for reduced rent based on income and family size, or who receive a federal stipend to help make their monthly rental payment. These residential units can either be managed by a housing authority or they can be privately managed by landlords or rental agencies that accept a government issued payment in conjunction with their tenant’s rental payment.

Low-income housing subsidies are offered through the Department of Housing and Urban Development (HUD). The income qualifications can be found on HUD’s web site and they are subject to change as wages grow or decline in a given area. A prospective renter must earn less than 50 percent of the median income in their area to qualify. While the aide is available to single renters as well as families, there are qualifications for room counts in prospective homes and single renters may be excluded from a housing project due to lack of availability of properly sized units.  

Low-income housing should not be confused with affordable housing, which is for families who are spending more than 30 percent of their income on housing.