A low-income housing alternative.

Author:Novogradac, Michael J.
Position:Tax credit program

A Low-Income Housing Alternative

In December 1989, President Bush signed legislation that provided about $3 billion in additional funding for the low-income housing tax credit (LIHC) program. The LIHC is expected to continue to be a critical piece of the administration's low-income housing legislative agenda. President Bush has asked for more funding for the LIHC program in the next budget he provided to Congress.

LIHC projects present a wide variety of opportunities for lenders and mortgage brokers willing to invest the time needed to understand the program. Through the LIHC program lenders have an excellent opportunity to make multifamily residential loans, to generate a high rate of return on an equity investment, and to satisfy certain Community Reinvestment Act obligations.

Mortgage brokers will find that the LIHC program is misunderstood by many lenders, and because of that LIHC developers often have a difficult time arranging financing. Developers often welcome the participation of mortgage brokers who have a working understanding of the LIHC.

The Low-Income Housing Tax Credit (LIHC or credit) was enacted as part of the Tax Reform Act of 1986. The credit was generally effective as of January 1, 1987. The LIHC is an indirect federal subsidy of low-income housing. To claim the subsidy, eligible taxpayers claim a tax credit on their federal income tax returns. The LIHC offsets taxes dollar for dollar because it is a tax credit and not a tax deduction.

The credit is claimed pro-rata over 10 years and can be used in connection with both new and existing buildings. To claim the credit, taxpayers must apply to the pertinent state allocation agency. These state agencies are responsible for allocating the limited quantity of credits to low-income housing projects. The one exception to these allocation rules is for projects financed by tax-exempt bonds. Low-income housing projects financed by tax-exempt bonds are generally not required to obtain a tax credit allocation in order to be eligible for the credit.

For new projects, the credit was initially funded through January 1, 1991. Projects that receive approval by December 31, 1990 were given until December 31, 1992 to be placed in service, if they satisfied certain transition rules. President Bush has announced his support for further funding of the LIHC program beyond December 31, 1990.

Once a project is placed in service, it is generally eligible for the credit every year for 10 years. To...

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