The Low Income Housing Tax Credit (Housing Credit) is a federal tax credit created by President Reagan and Congress in the Tax Reform Act of 1986 designed to encourage private sector investment in the new construction, acquisition, and rehabilitation of rental housing affordable to low-income households. Over the last three decades, the Housing Credit has become the most successful affordable rental housing production program in history.
The Housing Credit offers a dollar-for-dollar reduction in a taxpayer’s income tax liability in return for making a long-term investment in affordable rental housing. State agencies award Housing Credits to developers, who then sell the Credits to private investors in exchange for funding for the construction and rehabilitation of affordable housing. These funds allow developers to borrow less money and pass through the savings in lower rents for low‐income tenants. Investors, in turn, receive a 10‐year tax credit based on the cost of constructing or rehabilitating apartments that cannot be rented to anyone whose income exceeds 80 percent of area median income (AMI). Generally, Housing Credit properties serve households with incomes no more than 60 percent of AMI; however, properties that make use of the average income test may serve households earning up to 80 percent of AMI, so long as the average unit designation in the property is no more than 60 percent of AMI.
The program allows states to allocate Housing Credits to developments they select pursuant to qualified allocation plans (QAPs) they develop that identify the type, location, and other characteristics of affordable housing needed throughout the state.
The QAPs must describe the criteria agencies will apply in allocating the Credit and are subject to review after a public hearing and comment process. In this way, the Housing Credit empowers states to respond to the housing needs, priorities, and challenges they consider most important.
There are two components of the Housing Credit program: the “9 percent” Credit and the “4 percent Credit.” Each state’s 9 percent Housing Credit allocation is subject to a volume cap based on its population that limits the availability of the Credit in each state. In 2021, the state Credit cap is $2.81 times the state’s population, with a state minimum of $3,245,625. Volume cap figures are published by the IRS on an annual basis.
The 4 percent component of the program can only be triggered by the use of tax-exempt private activity multifamily Housing Bonds. Housing Bonds and the 4 percent Housing Credit finance approximately 50 percent of Housing Credit rental homes every year. Because multifamily Housing Bonds are limited by the Private Activity Bond volume cap, the 4 percent Credit is not subject to the Housing Credit volume cap. Not only do Housing Bonds make possible the production of substantial numbers of new Housing Credit properties, but they are essential to state efforts to preserve affordable housing.
- To find local housing assistance, please contact your state’s Housing Finance Agency (HFA).
- To learn more about NCSHA’s advocacy work in this area or to attend a related education event, complete the general inquiry form.
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