Topic 02 · 7 min read
The Low-Income Housing Tax Credit
The largest affordable-housing subsidy in the country, paid through the tax code.
The LIHTC pays developers to build or rehabilitate rental housing that stays affordable for decades. State agencies hand out a limited supply of credits each year through a competition. Owners claim the credit over ten years and must keep the rents and tenant incomes within limits for at least fifteen, usually thirty. Most investors meet it as limited partners buying into a deal rather than as developers.
What to know
- Nine percent and four percent
- The competitive 9 percent credit covers roughly 70 percent of eligible costs; the 4 percent credit, paired with tax-exempt bonds, covers about 30 percent and is not rationed the same way.
- Ten years to claim, fifteen to keep
- The credit runs over ten years, but the compliance period runs fifteen with an extended-use agreement usually stretching to thirty.
- Recapture has teeth
- Fall out of compliance — rents too high, tenants over income, units vacant to the wrong people — and a slice of the credit already claimed comes back with interest.
- Investors buy in, they do not apply
- Credits are usually sold to investors through a partnership; the price per credit dollar is the deal's real pricing mechanism.
The tax benefit
A steady, ten-year stream of dollar-for-dollar tax reduction, backed by a physical asset and a long compliance regime.
Worked example
A small 9 percent deal
A $10 million project with $8 million of eligible basis earns roughly $720,000 of credit a year for ten years. An investor paying 90 cents per credit dollar puts in about $6.5 million for $7.2 million of credits.
Watch out for
- Compliance paperwork is continuous and unforgiving; a good property manager is part of the investment.
- Credits are allocated by state agencies on their own scoring criteria, not first-come.
- Exiting a LIHTC partnership is slow and governed by the agreement, not the market.
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