The Low-Income Housing Tax Credit (LIHTC) program is a federal government tax credit that, since 1986, has helped facilitate the construction and rehabilitation of 3.6 million affordable housing units throughout the U.S., according to housing advocacy organization NAHRO. The purpose of the LIHTC program is to incentivize developers to create low-income housing by offering a 10-year credit on federal income tax. Without the incentive, affordable rental housing projects would not be as appealing to multifamily investors, since they otherwise might not generate sufficient profit to justify investment.

The Low-Income Housing Tax Credit (LIHTC) program was created in 1986 as part of the Tax Reform Act. The LIHTC is not a tax deduction, which would reduce a borrower’s taxable income. Instead, the credit provides a specific dollar amount tax discount, which can be applied to the investor or developer’s exact tax bill. In order to continue to take advantage of the tax credit, a developer must continue to keep their property in compliance. In 2016, the LIHTC program provided investors and developers approximately $8 billion in tax credits.

The LIHTC program is administered by individual states. Each state has a Qualified Allocation Plan (QAP), which details its exact requirements for LIHTC projects, which are typically stricter than the overall federal requirements. The federal government allocates a specific amount of credits to each state, based on the state’s population and a pre-determined multiplier. As both of these numbers can change, the amount of credits a state can get varies significantly.

Once the housing project is made available to tenants, investors are then able to claim the LIHTC over a 10-year period.

Low Income Housing Tax Credits (LIHTC) are federal tax credits designed to encourage private businesses to invest in affordable housing. The LIHTC program has assisted in the financing of nearly 2.5 million affordable rental units across the U.S. and can be used for mixed-use projects that include office buildings, retail projects, and multifamily apartment developments. The LIHTC program allows investors in qualified low-income properties to take a dollar-for-dollar deduction against their federal income taxes. In certain cases, the LIHTC program may be combined with the Opportunity Zones program to maximize returns. Other widely used tax credit programs include the HTC (Historic Tax Credit) program, which offers a tax credit based on the percentage of eligible expenses used to rehabilitate a historic building for commercial use, and the New Markets Tax Credit Program, which provides a tax credit for commercial development in low-income areas. In general, these tax credits programs are competitive, and thus, are typically utilized by institutions and funds rather than by individual investors.

The benefits of Low Income Housing Tax Credits (LIHTC) for commercial real estate include a dollar-for-dollar deduction against federal income taxes, the ability to combine with the Opportunity Zones program to maximize returns, and access to other tax credit programs such as the HTC and NMTC programs. It is important to consult with an experienced tax professional in order to better understand how each of these tax benefits may be able to work for you.

In order for a property to be considered eligible for the Low Income Housing Tax Credit (LIHTC) program, it must pass at least one of three affordability tests:

• 20% or more of the units are occupied by (or reserved for) tenants with an income of 50% or less of the area median income (AMI).
• 40% or more of the units are occupied by (or reserved for) tenants with an income of 60% or less of the AMI.
• 40% or more of the units are occupied by (or reserved for) tenants with an income of no more than 60% of the AMI, and the property has no units occupied by tenants with an income greater than 80% of the AMI.

In addition to the above, a gross rent test must also be passed. This test requires that rents for the property do not exceed 30% of either 50% or 60% of AMI (the exact percentage depends on the number of rental units set aside for the credit). LIHTC properties are required to pass these income and rent tests for a period of no less than 15 years — or risk having the tax credits recaptured by the local housing authority.

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Low Income Housing Tax Credits (LIHTC) can be used to finance mixed-use projects, but there are relatively strict limits when it comes to commercial space. First, no more than 10% of a building's eligible costs can go towards constructing commercial space. In addition, no more than 20% of the project's income can derive from a commercial source. If this rule is broken, the IRS considers the building a commercial space instead of a residential one and the project could lose many of its tax credits.

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The main risk associated with Low Income Housing Tax Credits (LIHTC) for commercial real estate is that if the project exceeds the limits set by the IRS, the project could lose many of its tax credits. According to Commercial Real Estate Loans, no more than 10% of a building's eligible costs can go towards constructing commercial space and no more than 20% of the project's income can derive from a commercial source. If these rules are broken, the IRS considers the building a commercial space instead of a residential one and the project could lose many of its tax credits.