Tax Credit Property: Definition, How to Qualify, and Benefits

What Is a Tax Credit Property?

A tax credit property is a housing project owned by a developer or landlord who participates in the federal low-income housing tax credit (LIHTC) program.

The property owners can claim tax credits for eligible buildings in return for renting some or all of a building's units to low-income tenants at a restricted rent.

The latest available data from the U.S. Department of Housing and Urban Development shows that between 1987 and 2020, 3.44 million affordable housing units were provided to low-income earners through the program.

How Tax Credit Properties Work

The low-income housing tax credit (LIHTC) program is designed to make the rents that low-income tenants pay more affordable. The government uses the tax credit to subsidize property owners who acquire, construct, or rehabilitate affordable rental housing. Apartment buildings, single-family homes, townhouses, and duplexes can qualify for the credit.

How the Program Works

• The federal government issues tax credits to state housing finance agencies, according to a calculation tied to a state's population.
• Each state agency determines its affordable housing needs.
• Developers apply for the tax credits, competing on the basis of whether or not, and how well, their construction projects meet the state’s affordable housing needs.
• Typically, developers sell the credits to private investors in exchange for funding.
• Once the housing units are rented, the property owner(s) can claim the tax credits over a 10-year period.
• However, the property must be maintained as affordable housing for a minimum of 15 years, the initial compliance period.
• A second 15-year affordability period is often involved.

How Property Owners Qualify for the Credit

To qualify for the tax credit, property owners (whether the developer or investors) must meet one of the following income criteria, and the gross rent criteria.

Income Criteria

1. A minimum of 20% of units have to house renters whose income is 50% or less of the area median income (AMI), or,
2. A minimum of 40% of the units have to house renters with an income of 60% or less of AMI, or,
3. A minimum of 40% of the units have to house renters with an average income of no more than 60% of AMI, and no units can house renters with income greater than 80% of AMI.

Gross Rent Criteria

1. Rents may not exceed 30% of either 50 or 60% of AMI, depending upon the share of tax credit rental units in the project.
2. The project must remain in compliance with the rent (and income) requirement for 15 years or the credits will be recalled. An extended 15-year use period applies (for a total of 30 years) unless the owner seeks regulatory relief. Certain states may require longer use periods.

Support and Criticism

Support

Supporters believe that a tax credit property provides low-income families and individuals with decent, affordable housing opportunities. People with reduced rents can spend more of their limited income on additional necessities. They can save some money for emergencies or their children's education.

There is a lack of modestly-priced housing across the country and in low-income communities; tax credits provide incentive to property owners to build quality and affordable housing.

More affordable housing can help low-income communities thrive, as well, since people with lower rents can afford to pay local businesses for products and services. Redevelopment in these communities means jobs and potentially more local investment.

Criticism

Some critics point to the growing cost of the LIHTC to the federal government, which is estimated to be $13.5 billion per year.

The federal subsidy per unit of new construction is considered too high because it compensates too many—organizers, syndicators, general partners, managers, and investors. Consequently, a smaller amount of money goes toward the development of new rental housing.

Moreover, critics say that too often, tax credit properties are concentrated in communities with too few economic opportunities rather than in more affluent urban areas where renters would have access to better-paying jobs and better schools. This only exacerbates social inequality.

Critics also state that the program regulations are overly complicated. Others feel it might be difficult for landlords to keep the housing affordable once the required compliance periods are over.

The Bottom Line

A tax credit property is a property that offers affordable housing to low-income families and individuals. The owner of the property (for example, a developer or investor) can claim tax credits from the federal government over a ten-year period in return for maintaining reduced rents for 15 to 30 years. The Low-Income Housing Tax Credit program came into being as a result of the 1986 Tax Reform Act.