Low-Income Housing Tax Credits (LIHTC)

LIHTCs were created under TRA-86 as a temporary system to replace the previous types of tax incentives for developers of low-income housing that were eliminated under. They are now one of the primary tools used by the federal government to fund affordable housing developments.

Under the LIHTC system, the IRS awards a dollar amount of credits to state housing authorities based on state population. In Minnesota, the funds are administered by the Minnesota Housing Finance Agency (MHFA) and 7 local housing agencies (Minneapolis, St. Paul, St. Cloud, Duluth, and Rochester, and Dakota and Washington counties). In 2012, the federal government allotted a total of $8 billion in LIHTCs. Minnesota received $12,000,000.

Unlike housing voucher programs, which are dependent on the incomes of households receiving the vouchers, LIHTC funding places restrictions on rents that properties may charge their tenants. LIHTC-funded developments must comply with either the 20/50 rule, under which 20% of the units be priced so that they are affordable to tenants earning 50% of area median income (AMI) set by HUD, or the 40/60 rule, under which 40% of the units must be affordable to tenants earning 60% of AMI. Most units are priced using the 40/60 rule.

Marshall River Run Apartments in Minneapolis, MN were funded by LIHTC

 

The 2008 Housing and Economic Recovery Act increased the amount of tax credits available and increased the per-project limit in an attempt to renew interest. There were further changes to the program as part of the 2009 American Recovery and Reinvestment Act. The 2009 act included the Tax-Credit Assistance Program (TCAP), which provided $2 billion in funding to cover gaps in project costs above the LIHTC limits, and the Tax Credit Exchange Program (TCEP), which allowed HFAs to obtain cash grants for LIHTC funds from 2008 and 2009 that were not used.

Among changes proposed by the Obama administration in the 2014 budget are revisions to the tax rules for LIHTCs and an income-averaging rule designed to promote mixed-income housing developments. Under current rules, at least 40% of project units must have rents affordable to households earning 60% of AMI. Under the new proposal, at least 40% of the units must have average rents affordable to households earning 60% of AMI. Although there is some question of whether this would actually promote mixed-income developments, it could potentially make some units affordable to those with incomes below 60% of AMI. Another proposed change is adding federal criteria for promoting the preservation of existing affordable housing through rehab projects. 

Map of LIHTC funded projects in the Minneapolis-St. Paul metro area

LIHTCs are an important part of US policy for the creation of affordable housing throughout the country. These federally funded, state and locally distributed, and privately purchased tax credits have both positive and negative aspects. Analysis of the impact and benefits of LIHTCs have had mixed results but there is evidence that they can be an effective tool for providing affordable housing, especially when used in conjunction with other housing cost burden reduction strategies such as rent voucher and other types of subsidies.