Housing Affordability
Low-Income Housing Tax Credits: Helping Meet the Demand for Affordable Rental Housing
Research Report
Kim Bright, AARP Public Policy Institute
March 2006
Table of Contents:
Introduction
The federal government’s primary vehicle for producing affordable rental housing is the Low-Income Housing Tax Credit (LIHTC). Enacted as part of the 1986 Tax Reform Act, the LIHTC has created approximately 1.3 million apartments since its inception, offering rents affordable to low-income families and elderly persons (see Figure 1).1
Top of PageHow the LIHTC Works
IRS Allocates Tax Credit Authority to SHAs
The Internal Revenue Service (IRS) and State Housing Finance Agencies (SHAs) jointly administer the LIHTC. The IRS issues an annual allocation of tax credit authority to SHAs using a formula that includes a credit ceiling. Congress imposed a credit ceiling in 1986 of $1.25 and indexed this ceiling to inflation beginning in 2003. For the calendar years beginning in 2005, the credit ceiling is the greater of $1.85 multiplied by the state population or $2,125,000.2
SHAs Award Tax Credits to Developers
SHAs award tax credits to developers for the acquisition, rehabilitation, or new construction of affordable rental housing. The IRS requires SHAs to submit annual Qualified Allocation Plans (QAPs) prioritizing their state’s housing needs and explaining the criteria they will use to award their tax credit allocations to developers. Within the QAP, states establish preferences and set-asides to guide the selection of projects to award tax credits.3 Targeted groups can include those who are mentally or physically disabled, elderly, homeless, minorities, and large families. The selection process is competitive. According to the National Equity Fund, many SHAs see requests for two to three times the number of available credits.
Developers Must Meet Eligibility Requirements4
To qualify for tax credits, developers are required, at a minimum, to rent 40 percent of their units to tenants with incomes equal to or less than 60 percent of the area median income, or to rent 20 percent of their units to tenants with incomes equal to or less than 50 percent of the area median income. Most LIHTC properties rent more than 80 percent of the units to low-income tenants.5 The minimum required units must remain at the above levels for at least 30 years. The rent on LIHTC units is limited to 30 percent of the tenant’s qualifying income.6
Developers Exchange Tax Credits for Capital
Once developers are awarded tax credits, they offer the credits to investors. Investors obtain a dollar for dollar reduction in their federal tax liability in exchange for providing capital to the developer to finance qualified, affordable rental housing. Investors claim the tax credits in equal installments over a 10-year period to offset taxes owed on their tax returns. The incentive provided through the LIHTC is critical because rental income and returns from investment in affordable housing are not always adequate to cover project costs.
Project Characteristics
Resident Characteristics
The Government Accountability Office found that the average LIHTC apartment renter earns 37 percent of area median income. Many households receive additional rental assistance to enable them to afford to pay 30 percent of their qualifying income to live in their LIHTC units. For example, 44 percent of LIHTC properties placed in service from 1995 through 2002 were occupied by residents receiving tenant-based rental subsidies through the Housing Choice Voucher Program.7
Property Characteristics
For LIHTC units placed in service between 1995 and 2002, approximately one-third of the projects had a nonprofit sponsor. Just under half of LIHTC properties were located in central cities, and nearly two-fifths were in suburbs. In addition, 63 percent of these properties were new construction. Rehabilitation of an existing structure took place in 36 percent of the projects, while a combination of new construction and rehabilitation took place in only a small fraction of LIHTC properties.8
LIHTC and Older Renters (Age 65+)
The 2003 American Housing Survey (AHS) indicates a median household income for older renters of $13,831. Analyses of data from the 2003 AHS indicate that 55 percent of older renter households incurred “excessive expenditures” for housing (monthly housing costs in excess of 30 percent of income). As a result of low incomes and high costs for housing, there is a high demand for affordable housing among older renters. Although approximately 24 percent of LIHTC properties are intended primarily for older persons,9 the supply of LIHTC units is insufficient to meet the demand. Consequently, older persons encounter long waiting lists and low vacancy rates for LIHTC units.10 As the population ages and some LIHTC properties approach the end of their 30- year affordability requirement, the program must consider ways to address the increasing need for affordable rental housing.
Footnotes
1 HUD Low-Income Housing Tax Credit Database (2004). This database contains data for LIHTC units placed in service between 1987 and 2002. Based on the average number of units placed in service 1987—2002, the number of units placed in service 2003—2005 was estimated.
2 Section 42 of the Internal Revenue Code; 2005 Calendar Year Resident Population Estimates Notice 2005-16.
33 Federal law requires that the allocation plan give priority to projects that: a) serve the lowest-income individuals, and b) are structured to remain affordable for the longest period.
4 States are required to monitor LIHTC properties for compliance and must report incidences of noncompliance to the IRS, which has the authority to recapture the credits.
5 Serving the Affordable Housing Needs of Older Low-Income Renters: A Survey of Low-Income Housing Tax Credit Properties, AARP, 2002.
6 The capital that the developer receives from the investor in exchange for tax credits reduces the property’s mortgage and enables the developer to accept rents that comply with the program’s rent requirement.
7 Updating the Low-Income Housing Tax Credit Database: Projects Placed in Service through 2002, HUD, December 2004.
8 Ibid.
9 Serving the Affordable Housing Needs of Older Low-Income Renters: A Survey of Low-Income Housing Tax Credit Properties, AARP, 2002.
10 Ibid.
Written by Kim Bright, AARP Public Policy Institute
September 2005
©2005 AARP
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