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Housing Tax Credits
Created by the Tax Reform Act of 1986, the federal Low Income Housing
Tax Credit, also known as Internal Revenue Code Section 42, encourages
the private sector to invest in the construction and rehabilitation
of affordable rental housing for low and moderate income families.
Project sponsors and investors of qualified affordable housing developments
can use these tax credits as a dollar-for-dollar reduction of federal
income tax liability. The private equity capital generated from
the syndication of the tax credits allows residences to be leased
to qualified families at below market rate rents.
The amount of tax credits available to a project sponsor is tied
to the costs involved in building the low income units. Tax credits
are calculated to provide up to 70% of the present value of these
costs. The project sponsor solicits investors to become partners
in the ownership of the low income buildings. In return for their
equity investment, the investors receive the tax credits.
Except for certain projects substantially financed with tax-exempt
bonds, a project sponsor must first obtain a tax credit allocation
from the designated state agency that has the authority to allocate
tax credits under the federal program. To be considered for an award
of tax credits, an application must be submitted to the state agency
during its annual application acceptance period. The total tax credit
dollar amount, that is available for allocation by each state, is
limited by its population. In most states, because of excess demand,
the competition for these tax credits is very high.
To be eligible to receive the low income housing tax credits, the
rental residential building must be placed in service, with at least
partial occupancy, within 24 months after December 31st of the year
in which the allocation is awarded. Then, the affordable housing
project must comply with a number of requirements regarding tenant
income, maximum rent levels, and percentage of low-income occupancy
for a minimum of 15 years.
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