Low Income Housing Tax Credit - FAQs
What is the Low Income Housing Tax Credit?
The LIHTC is a dollar-for-dollar tax credit used throughout the U.S. for affordable housing investments. It was created under the Tax Reform Act of 1986 (TRA86) and gives incentives for the use of private equity in the development of affordable housing aimed at low-income Americans. LIHTC accounts for nearly 90% of all affordable rental housing created in the United States today.
To date, it also has been the most successful rental housing production program in Arizona, creating thousands of residences with very affordable rents. The Low-Income Housing Tax Credit, rather than a direct subsidy, encourages investment of private capital in the development of multi-family rental housing by providing a credit to offset an investor's federal income tax liability.
How does the tax credit work?
The credits are commonly called Section 42 credits, in reference to the applicable section of the Internal Revenue Code. The tax credits are more attractive than tax deductions as they provide a dollar-for-dollar reduction in a taxpayer's federal income tax, whereas a tax deduction only provides a reduction in taxable income. The "passive loss rules" and similar tax changes made by TRA86 greatly reduced the value of tax credits and deductions to individual taxpayers. As a result, almost all investors in LIHTC projects are corporations and developers.
What are the conditions for a property to receive the LIHTC?
The first step in the process is for a project owner to submit an application to the state authority, which will consider the application competitively. (www.housingaz.com)
The amount of tax credits available for allocation each year by ADOH is established according to certain requirements of the Internal Revenue Code. Tax Credits are awarded for specific developments as outlined in ADOH's LIHTC Qualified Allocation Plan. Tax Credits must be allocated by ADOH to a specific development in order for such credits to be claimed by the developer or investor. The procedures followed by ADOH in awarding credits are described in the current Qualified Allocation Plan (QAP).
Eligible Developments for the LIHTC
In order to be considered for tax credits in Arizona, the proposed development must involve new construction, substantial rehabilitation or acquisition and substantial rehabilitation.
A development qualifies for low-income housing tax credits if it is residential rental property and meets one of the following requirements:
- At least 20% or more of the residential units in the development are both rent restricted and occupied by individuals whose income is 50% or less of the area median gross income (AMGI)*, or
- At least 40% or more of the residential units in the development are both rent restricted and occupied by individuals whose income is 60% or less of the area median gross income (AMGI)*.
How is LIHTC used in Glendale?
The city of Glendale does not offer the LIHTC; it is awarded through the state of Arizona Housing Department. (www.housingaz.com)
Glendale will work with developers interested in bringing quality development and/or redevelopment projects to Glendale.
Please be advised that the project must complete an internal review process, which may take up to 30 days to complete.