Affordable Housing Tax Benefit Through Low-Income Housing Tax Credit (LITHC): An Explanation of Its Operations
The Low-Income Housing Tax Credit (LIHTC) is a significant initiative aimed at providing affordable rental housing for low-income individuals and families. Established in 1986 through the Tax Reform Act, this programme has been instrumental in creating over 3.7 million affordable housing units between 1987 and 2023, according to the latest data from the U.S. Department of Housing and Urban Development (HUD).
Every year, the LIHTC programme provides state and local agencies with the authority to distribute around $9 billion annually in federal tax credits. This market-based approach effectively deploys capital, creating affordable rental housing for those in need.
For developers, the LIHTC offers two main types of federal tax credits: the 9% credit and the 4% credit. The 9% credit can only be used if the building project will have no other credits or government subsidies applied to it. On the other hand, the 4% credit can be used in conjunction with federal tax-exempt bond financing.
For every dollar of tax credit received, developers can reduce a dollar's worth of their federal income tax owed. This incentive encourages investment in affordable housing, contributing to the creation of more such units.
However, the LIHTC is not without its critics. Some argue that it contributes to inflation of housing prices, leading to areas of higher poverty levels. Others contend that it does not properly address the high cost of housing due to the limited term of affordability. Critics also point out that the programme may not adequately serve single renters, as HUD housing subsidies have qualifications for room counts in prospective homes, and single renters may be excluded from a housing project due to lack of availability of properly sized units.
Despite these criticisms, the LIHTC remains a vital programme in the United States, providing a much-needed solution to the issue of affordable housing. Prospective tenants seeking low-income housing must locate a property that qualifies for the tax credit and meet certain income requirements. To be eligible, applicants must earn less than 60% of the Area Median Income (AMI). The LIHTC housing project must also rent to tenants whose average income is below the area's median income, and this commitment must be maintained for a period of 15 years.
It's worth noting that less than 1% of the properties under the LIHTC program have entered foreclosure, fewer than for any other property type. This stability suggests that the programme is effective in ensuring the long-term affordability of its housing units.
Despite the availability of data on the number of affordable housing units created by the LIHTC, there is no available data in the search results regarding the cost development of the Low-Income Housing Tax Credit in recent years. This is an area that could benefit from further research and transparency.
In conclusion, the Low-Income Housing Tax Credit is a crucial programme that has helped millions of low-income individuals and families secure affordable housing. While it is not without its criticisms, its positive impact on the lives of many cannot be overstated. As affordable housing remains a pressing issue in the United States, the LIHTC continues to play a vital role in addressing this need.
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