How Developers Use LIHTC to Reduce Their Tax Expenses
The Low-Income Housing Tax Credit (LIHTC) program, sometimes referred to as section 42, is a government initiative that encourages private investors to finance housing for low-income families and individuals. To do this, the LIHTC program provides an indirect federal subsidy in the form of a tax credit that a developer or investor can claim on their income tax return. This program can be used with FHA multifamily construction loans, like the HUD 221(d)(4) loan. In addition, loans involving LIHTC can also often qualify for streamlined processing, which can cut significant time off the loan application process.
How Developers Save Money With LIHTC
Typically, LIHTC is calculated as a percentage of the cost of developing a project. And, it allows the beneficiary to claim it annually over a 10-year period. LIHTC amounts can be calculated with two different credits:
The 4% credit (which takes the value 30% of the eligible costs of the project)
The 9% credit (which takes the value of 70% of the eligible costs of the project.)
The specific kind of credit that works for a project usually depends on whether government bonds are used to finance it.
What Kinds of Projects Qualify for LIHTC Credits
For a HUD multifamily project to qualify for the LIHTC program, developers must allocate a minimum of 40% of the building's units for tenants who earn 60% or less of the area median income. Or, vice versa, developers must allocate 20% of the building's units for tenants who earn no more than 50% of the area median income. However, since competition of LIHTC credits can sometimes be fierce, some developers choose to designate 80%, 90%, or even 100% of the units in the project for low-income residents.