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The Low Income Housing Tax Credit – Don’t Lose it!

What is the Low Income Housing Tax Credit (LIHTC)?

The LIHTC was created in 1986 as a way to help finance and restore more affordable rental housing. Instead of the project having high amounts of rental income that normally would bring in investors, the LIHTC gives investors a large incentive to finance these projects in the form of a tax credit. The LIHTC offers a great tax advantage of having a ‘dollar for dollar’ tax reduction on the investor’s federal tax liability.

Can Credits be Lost?

Yes, there are a few ways that investors can lose the credit, all of which can be avoided. The most prevalent relate to being out of compliance with the income rules.

The project must be compliant for the duration of the period for which the credit is being claimed. Credits are typically claimed over a 10 year period, but may be deferred for longer through the full compliance period of 15 years. Instances of non-compliance during these periods can trigger a recapture of previously earned tax credits. A use agreement may also extend the compliance period for an additional 15 years.

Common Acts of Noncompliance

There are many ways a project can be deemed non-compliant. Below are some examples of this from IRC Section 42:

1. Failing to meet the 20-50 test

Under the 20-50 test, a project is deemed compliant when “20 percent or more of the residential units in such project are both rent-restricted and occupied by individuals whose income is 50 percent or less of area median gross income.”

2. Failing to meet the 40-60 test

Under the 40-60 test, a project is deemed compliant when “40 percent or more of the residential units in such project are both rent-restricted and occupied by individuals whose income is 60 percent or less of area median gross income.”

The investor can make the election to use either of these tests when using the credit; however, this is a one-time election and it cannot be amended once made.

3. Tenant evictions

The purpose of the LIHTC is to help individuals and families find affordable housing, but what happens to tenants when they exceed the income threshold after moving into the unit? The project cannot evict the tenant due to this, and there may be scenarios that would require the next available unit, even if it was not intended for low income housing, to be rented to tenants who meets the low income housing qualifications.

When they move in, tenants must meet the qualification of low income housing; otherwise, the credit could be at risk for noncompliance.

4. Rent is too high

Landlords typically want to be able to charge market rate for rent and sometimes even higher based on the location of the property, but the LIHTC prohibits that. The project cannot charge tenants who are in the low income housing program more than the allowable amounts as set forth by the IRS.

Key Takeaways

Even though these are only a few ways that a project can fall into noncompliance, these tend to be the most common reasons. During the compliance period of a LIHTC project, care should be taken to keep tabs on the project’s compliance factors so as not to lose valuable tax credits.

For questions or further information, contact a member of Withum’s Real Estate Services Team.

Authors: Nick Barker | nbarker@withum.com

Real Estate Services

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