This credit is called the Low-Income Housing Tax Credit and is governed under Section 42 of the Internal Revenue Code. Congress has delegated the administration of low-income housing tax credits to the states.
Why would the government need to give an incentive to encourage investment in affordable housing? Due to the restrictions on the amount of rent allowed to be charged, many affordable housing projects will not produce a positive cash flow until the project is in maturity. The purpose of affordable housing is to provide safe, decent, stable and affordable housing for vulnerable families and individuals. These include, but are not limited to, families and individuals who earn below the poverty guideline, disabled individuals and elderly citizens.
There is a high demand for affordable housing, and the cost of living in many major cities continues to rise. According to the National Low-Income Housing Coalition, there is a shortage of affordable housing available for extremely low-income renters. See below for a summary of the shortage for several key states:
The chart above shows the level of demand by comparing the number of extremely low-income renters (in blue) and the lack of rental homes (orange). California alone has a shortage of almost a million rental homes.
But why invest if there is such a delay in positive cash flow for developers and investors? Although this delay is not very attractive, many capital investors rely on the low-income housing tax credits as a way to increase their rate of return on the projects and help to overcome the perceived risk of investing in affordable housing. There are many other benefits to affordable housing besides the low-income housing tax credits. Some of these benefits include:
Effective planning is not only the first step, but it is critical to maximizing the credits and benefits available for low-income housing credit projects. Understanding the state program requirements, available financing and other benefits can help maximize profits on projects as a whole.