New Homeowner Tax Credit: The Nation's Housing Success Story

The low-income housing tax credit has financed more than 3 million affordable homes over three decades.

By Christine Serlin

The low-income housing tax credit (LIHTC) has become the most successful tool for producing and preserving affordable housing across the nation for families, seniors, veterans, the disabled, and formerly homeless individuals.

In its 31-year history, the LIHTC has financed over 3 million affordable housing units and provided homes for approximately 7 million low-income households. An average of over 1,400 projects and 110,000 units were placed in service yearly from 1995 to 2015, according to the Department of Housing and Urban Development’s LIHTC database.

Established as part of the Tax Reform Act of 1986 under President Ronald Reagan, the program has earned strong bipartisan support throughout its history. Support for the program most recently was seen when the LIHTC was one of only two tax credits included in the Republican leadership’s tax reform framework released at the end of September. (The other was the research and development tax credit.)

In addition, bipartisan legislation in the House and Senate seeks to expand and further strengthen the program. Sens. Maria Cantwell (D-Wash.) and Orrin Hatch (R-Utah) reintroduced the Affordable Housing Credit Improvement Act earlier this year to increase the LIHTC program by 50% to help create or preserve approximately 1.3 million affordable homes over a 10-year period and to make several modifications to strengthen the program. S. 548 includes 21 co-sponsors, including 11 Democrats, nine Republicans, and one Independent.

“One reason I support the LIHTC is that it … allows decisions on housing to be made within the communities where the housing is needed while involving the private sector,” Hatch said at a Senate Finance Committee hearing on the tax credit in August.

Reps. Pat Tiberi (R-Ohio) and Richard Neal (D-Mass.) introduced the House version of the bill in March.  H.R. 1661 had garnered 121 co-sponsors, 60 Republicans and 61 Democrats, at press time.

“The LIHTC is a vital and effective tool to address the affordable housing crisis in America,” said Tiberi when the legislation was announced. “It’s a great example of how the private sector can work with government to help families, individuals, and seniors find a safe and decent place to live and call home. I look forward to working with Congressman Neal and the rest of the Ways and Means Committee as we reform our tax code to ensure that this incentive to provide affordable housing remains strong.”

How the LIHTC Works

The LIHTC’s unparalleled record of achievement comes from the public–private partnerships the program demands.

Each state receives a certain amount of LIHTCs from the federal government every year, based on the state’s population. In 2018, the amount used to calculate the LIHTC state ceiling will be $2.40 multiplied by the state population, up from $2.35 the past two years. The small-state minimum will be $2,765,000, a $55,000 increase from $2,710,000 in 2017.

With public input, states prepare qualified allocation plans that spell out their housing priorities and how they’ll allocate the credits.

Developers must then compete to win the credits. The demand for LIHTCs typically far outpaces the supply a state has to allocate. After receiving an allocation, developers sell the housing credits to investors to raise equity to build their developments. As a result, the projects are reviewed by investors.

Credits aren’t earned until a project is completed and operating, so there’s minimal risk to the federal government.

LIHTC developments must set aside at least 20% of their units for residents earning no more than 50% of the area median income (AMI), or 40% of the units for people earning no more than 60% of the AMI. The majority of LIHTC properties, however, target 100% of the units at 60% of the AMI and below.

The developments generally remain affordable for 30 years or longer.

At the end of October, Rep. Suzan DelBene (D-Wash.), who is a co-sponsor of H.R. 1661, also introduced the Access to Affordable Housing Act to increase the LIHTC by 50%.

Reps. Adam Smith and Pramila Jayapal are co-sponsors of DelBene’s bill; all three represent Washington’s King County, where housing demand and costs have skyrocketed in recent years.

Strong track record

The LIHTC program harnesses private-sector investment capital and discipline to make housing developments true public–private partnerships. As a result, foreclosures have occurred in fewer than 1% of all LIHTC properties, lower than for any other real estate asset type.

The reasons for the housing credit’s success are multifold:

Only developments that meet federal and state housing priorities receive credits and only the amount necessary to make the projects viable.
The program is administered at the state level. Although the LIHTC is a federal program overseen by the Internal Revenue Service, each state issues a qualified allocation plan to allocate the credits. This allows the states, with public input, to adapt the program to meet their residents’ particular housing needs. In many states, the demand is two or three times the supply, so only the strongest developments are selected.
Compliance is closely monitored. Owners are subject to credit recapture for 15 years, and all properties generally remain affordable for 30 years or more.
The housing credits leverage private capital. The program was designed to provide only a portion of the development cost, so developers must compete for other funding sources.
The LIHTC employs a pay-for-performance policy, limiting any risk to the federal government. The private sector bears the risk, with investors getting to claim and keep the tax credits only if the units are built, leased, and maintained as affordable housing throughout the initial 15-year compliance period. Additionally, there’s a 15-year extended-use period, with many states requiring a longer period of affordability.
The LIHTC also is credited with being a job creator and income generator. According to the National Association of Home Builders, the credit supports 3.4 million jobs for one year and generates $323 billion in local income and $127 billion in tax revenue annually.