Low-Income Housing Tax Credit (LIHTC - often pronounced "technology lie", Housing Loan) is a dollar-for-dollar tax credit in the United States for affordable housing investment. It was created under the 1986 Tax Reform Act (TRA86) and provides incentives for private equity use in the development of affordable housing destined for low-income Americans. LIHTC accounts for the majority (about 90%) of all affordable rental housing made in the United States today. Because the maximum rental that can be charged is based on Median Area Income ("AMI"), LIHTC housing remains unattainable by many low-income tenants (& lt; 30% AMI). Credit is also commonly referred to as Section 42 credit refers to the section applicable in the Internal Revenue Code. Tax credits are more attractive than tax deductions because credits provide dollar-to-dollar deductions in federal taxpayer income taxes, whereas deductible taxes only provide a reduction in taxable Income. "The rules of passive loss" and similar tax changes made by TRA86 greatly reduce the value of tax credits and deductions for individual taxpayers. Less than 10% of current credit expenditures are claimed by individual investors.
In 2010, the Presidential Economic Recovery Advisory Board (PERAB) estimated that the LIHTC program would cost the federal government $ 61 billion (on average about $ 6 billion per year) in lost tax revenues from participating companies from 2008-2017, that experts believe that vouchers will be more cost-effective to help low-income households.
Video Low-Income Housing Tax Credit
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The 1986 United States Tax Reform Act (TRA86) had a negative impact on many investment incentives for rental housing while leaving an incentive for home ownership. Because low-income people are more likely to live in rental housing than in owner-occupied housing, this will reduce the supply of new housing they can access. The Low Income Housing Tax Credit (LIHTC) is added to TRA86 to provide balance and encourage investment in multifamily housing for those who need affordable rental housing options. Over the next 20 years, this has become a very effective tool for developing affordable rental housing. The LIHTC program has helped meet a very affordable housing shortfall by stimulating the production or rehabilitation of nearly 2.4 million affordable homes since 1986. Through development activities, LIHTC creates and supports around 95,000 jobs each year - mostly small enterprise jobs.
Maps Low-Income Housing Tax Credit
How it works
LIHTC provides funding for low-cost housing development costs by allowing investors (usually residential partnership partners) to take a federal tax credit equal to a percentage (up to 70% or 30% of PV (Property Value) depending on the type of credit) issued for the development of low-income units in rental housing projects. Capital development is raised by "syndication" of credit to investors or, more generally, a group of investors. To take advantage of LIHTC, developers will typically submit projects to state agencies, seek and win competitive tax credit allocations, complete projects, authorize fees, and rent projects to low-income tenants. At the same time, investors will find that it will make a "capital contribution" to a partnership or limited liability company that has a project in exchange for "allocating" the LIHTC entity over a ten year period. The credit amount will be based on (i) the amount of credit awarded to the project in the competition, (ii) the true cost of the project, (iii) the rate of tax credit announced by the IRS, and (iv) the percentage of project units leased to the low-income tenants. Failure to comply with applicable rules, or the sale of a project or ownership interest before the end of at least a period of 15 years, may lead to reclaim credit previously taken, as well as the inability to take credit in the future. These rules are described in more detail below.
The program structure as part of the tax code ensures that private investors bear the financial burden if the property is unsuccessful. This pay-for-performance accountability has encouraged private sector discipline into the LIHTC program, which results in a foreclosure rate of less than 0.1%, much lower than comparable market-level properties. As a permanent part of the tax code, the LIHTC program requires public-private partnerships, and has leveraged over $ 75 billion in private equity investments for the creation of affordable rental housing.
Application process
The first step in the process is for the project owner to apply to the state authorities, who will consider the application competitively. This app will include expected project cost estimates and commitment to comply with one of the following conditions, known as "set -side":
- At least 20% or more of residential units under development are both limited rent and occupied by individuals who earn 50% or less of the median median median revenue.
- At least 40% or more of residential units in the development of both leases are limited and are occupied by individuals who earn 60% or less of the median median median revenue.
Typically, project owners will approve a lower percentage of low-income usage than this minimum, up to 100%. A low-income tenant may incur a maximum lease of 30% of the maximum eligible income, which is 60% of the regional income median adjusted to the size of the household as determined by the HUD. There are no restrictions on the lease that can be charged to tenants who are not low-income but living on the same project.
Program administration
The program is administered at the state level by state housing finance institutions with each country getting a fixed credit allocation based on its population. The state housing agency has wide discretion in deciding which projects to award credits, and applications are considered under the state's "Quality Allocation Plan" (QAP). Credits are usually awarded to the project in several "rounds of allocations" held annually, on a competitive basis. Typically, top-ranking projects will get credit, then the second, and so on until the credit runs out for a round. Part of the state credit should be "set aside" for projects sponsored by nonprofit organizations, although non-profits typically apply more to credits under "general" rules, regardless of allowance.
This allows each country to set its own priorities and address its specific housing objectives. It also encourages developers to offer better benefits than the minimum set when competing with other projects (for example, charging a lower lease, or retaining low income requirements for a few more years, often increasing the ranking of projects in the competition process; check state and application QAP to see how this rating was made).
Not all projects claim low-income credits based on this competitive process. Projects financed by tax-exempt bonds may also qualify for credit. Certain types of tax-exempt bonds are also limited to state-by-country bases, and the state agencies responsible for bonds may differ, but state agencies generally apply the same rules as the institutions responsible for the tax credit program.
Required & amp; Terms
The project owner must agree to comply with Article 42 and maintain the percentage of low-income units approved in the "Land Acquisition License Agreement" (LURA) recorded. Under LURA, the project is required to meet certain low-income project requirements for the initial 15 year "compliance period" and the "extended period of use" the next 15 years (or longer, if required by local authorities; extended use rules added in 1989, and does not apply to projects developed within the first few years of the program). Credit is subject to "reclaim" if the project fails to comply with the requirements of Article 42 of the Tax Code during the 15 year period of compliance. Rules that require taxpayers to post "ties" if a recurrence event occurs is revoked in 2008.
Eligible bases
The "eligible basis" of a project is the cost of acquiring an existing building if there is one (but not land costs), plus construction and other construction related costs to complete the project. (For example, the cost of obtaining permanent financing, or "syndication" of credits for investors is not included) Adjustments must be made to federal grants as well.). This is then multiplied by the percentage of "low-income" units, in accordance with the conditions described above, to determine the "qualification base" of projects that actually qualify for credit. For this reason, many developers agree to make 100% of low-income units maximize potential tax credits. Projects for (1) new construction and (2) existing building rehabilitation costs, if not funded by tax-exempt bonds, may receive the maximum annual tax credit allocation based on tariffs that are generally 9% of the project's eligible bases. The cost of acquiring existing buildings (but not land), and projects financed in whole or in part with tax-exempt bonds, are eligible for credit of about 3% to 4% per annum. The percentage of loans is announced monthly by the Internal Revenue Service, but for buildings placed in service after 30 July 2008, loans for new and rehabilitated buildings that are not financed by tax-free bonds are not less than 9%. Rules that grant lower credit rates for "under-market federal borrowings" were repealed in 2008, apply to buildings placed in service after July 30, 2008. Other rules that do not allow credit for existing building costs, unless they were last placed in service more than ten years ago, no longer applies if the building was substantially financed under a large number of federal or state programs.
Credit limit
Regardless of the results of these calculations, credits can not exceed the amount allocated by state agencies. For example, suppose a project costs $ 100,000 for the land, $ 400,000 for an existing building that was recently placed in service over ten years ago, and $ 1,000,000 for rehabilitation; also assume that the prevailing percentage is 3.5% and 9%, that the project will be 80% of low-income, that there is no tax-free bond, and that the state agency awarded $ 70,000 per credit year. Credit is calculated as follows - (1) the cost of land is not eligible for credit; (2) maximum annual credit for building purchase is $ 400,000 times 80% times 3.5%, or $ 11,200; (3) maximum annual credit for rehab is $ 1,000,000 times 80% times 9%, or $ 72,000. Total annual credit is maximum, $ 83,200, more than the amount of credit granted by the state. As a result, the project is limited to $ 70,000 credits annually.
Credit is not awarded simultaneously but claimed in the same amount for 10 years "credit period" (many projects claim credit for 11 years, due to rules governing how much credit can be claimed in the first year of the crediting period). Thus, the $ 70,000 annual credit described in the illustration will result in a total of $ 700,000 of credit over the crediting period.
Syndication and partnership
Tax credits, or equities, syndicators link private investors looking for strong returns on investment with developers seeking cash for quality LIHTC projects. As mentioned above, credit is used to generate private equity, often before, or during, project development. Developers typically "sell" credits by entering into a limited partnership (or limited liability company) with investors, with 99.99% of the profits, losses, depreciation, and tax credits allocated to investors as partners in the partnership. Developers function as partners/members of general managers, and receive most of the cash flow (either through payment of fees, or through distribution). The funds generated through syndication vary from market to market and from year to year. Although 85-95 ¢ for each total dollar tax credit is common in the first few years of the 21st century, the recent turmoil in financial markets has reduced some of the demand for tax breaks, meaning that investors paid somewhat less, as early as 2008 So, for example, $ 10,000 of credit per year for the next 10 years would be $ 100,000 total, and the developer might be able to collect $ 75,000 - $ 85,000 through syndication, which is less than could be raised for several years before 2008. Furthermore, the fact that depreciation in buildings owned by the partnership is also tax deductible, and that depreciation is allocated 99.99% to investors, investors can pay more for total tax benefits. (Indeed, when the credit itself sells for 95 cents per dollar of credit, there are cases where investors actually pay a little over a dollar for dollar tax credits plus other tax benefits.) In 2014, when Congress re-evaluates "tax-expenses", the fate of the LIHTC program is questionable because of the high "soft" costs and relatively low investor yields.
An investor will usually remain in partnership for at least a period of compliance, as a reduction in interest may also result in a credit recovery. An investor who wishes to exit the partnership before the end of the compliance period may post a surety bond to avoid credit repayment.
The following table summarizes the relationship between developers and outside investors. NOTE : This is only intended to demonstrate the concept of partnership for such projects and not to be a literal guide for developing LIHTC projects.
In 2010, the Presidential Economic Recovery Advisory Board (PERAB) estimated that the LIHTC program would cost the federal government $ 61 billion (on average about $ 6 billion per year) in lost tax revenues from participating companies from 2008-2017, that experts believe that vouchers will be more cost-effective to help low-income households. Annual allocations under the program increased significantly in 2001 when Congress increased the state allocation by 40%.
Compliance
States are also responsible for monitoring the ongoing development costs, quality and operation of approved projects, and the threat of enforcement of notices to the IRS of "non-compliance" if the project deviates from the applicable requirements of the Code and LURA, described above. Such notification may lead to a repetition of previously taken credits and the inability to claim credit from future projects. The IRS has issued Form 8823 for the purpose of reporting possible problems with the project, and a Guide to Form 8823 detailing the IRS's view of various issues related to non-compliance.
LIHTC property owners and their management agents should be able to prove tenants living in low income units meet the Feasibility Requirements of the LIHTC Program and remain eligible for their rental period. [Section 1.42-5 (b)] [1] The initial eligibility requirements include, but are not limited to, income eligibility, rental restrictions, full-time student restrictions, and excluding part of 8 applicants. Also, every year a tenant remains in a low-income unit, re-examination or re-certification must be made to ensure the tenant continues to keep the LIHTC Program eligible. Failure to properly prove the initial feasibility and re-examine the ongoing eligibility is non-compliance and put LIHTC owners at risk of losing their credit claims.
A thorough documentation of the tenant's eligibility is required and records must be maintained for each qualified tenant. Records of the first year of participation in the LIHTC Program shall be maintained for 21 years from the date of the tax return claiming this credit is filed including all extensions, and the subsequent year records shall be maintained for 6 years from the date of the tax refund claiming the applicable credits filed including all extensions. [Section 1.42-5 (b) (vii) (2)] [2]
The owner must report the LIHTC property compliance status at least annually to the State Allocation Board from which it receives its credit allocation. [Section 1.42-5 (c)] [3] At least annually, the State Appropriations Board is required to monitor and inspect the LIHTC property in which it has allocated credits. Any noncompliance found or suspected should be reported to the Internal Revenue Service (IRS) using the IRS Form 8823. The State Allocation Institution must follow very specific requirements to monitor, check and report as determined by the IRS. [Sections 1.42-5 and Federal Register: January 14, 2000 (Volume 65, Number 10) Ã, - Compliance Monitoring and Other Issues Relating to Low-Income Housing Credit] [4]
Their owners and management agents are strongly encouraged and in some cases mandated by their State Appropriations Board to become certified compliance professionals. Certification can be obtained by several LIHTC industry groups. Certifications include the National Compliance Professional (NCP), Site Compliance Specialist (SCS), Housing Credit Certification Specialist (HCCP), Housing Credit Management Specialist (SHCM), and Certified Certified Compliance Professional (C3P). Certification requirements typically include Education and Experience Requirements. Educational requirements are met by successfully passing the industry exam and obtaining the required number of hours of coursework. Experience requirements vary between mentions. All titles also contain an ongoing education component to ensure certified professionals keep their knowledge and keep up with the LIHTC Program.
The 2008 Financial Crisis Impact on LIHTC
Under the law, the only investor who qualifies for the Low Income Tax Credit (LIHTC) investment is a large C corporation. As financial markets deteriorate in the second half of 2008, so does corporate earnings C which is usually offset by tax credits, such as LIHTC. As a result, the market for LIHTC is destroyed. The development of new tax credit properties and rehabilitation activities for older older housing properties froze completely.
Congress took action in February 2009 to help resume the LIHTC market. The American Recovery and Reinvestment Act in 2009 created two gap financing programs to help tax credit property, which are ready to start construction, get additional funding.
First, Title XII of the Recovery Act allocates $ 2.25 billion for the HOUS (HOUSE) Investment Investment Program - administered by the US Department of Housing and Urban Development (HUD) - for a grant program to provide funds for capital investments in LIHTC projects. HUD grants TCAP grants to state mortgage agencies to facilitate the development of projects that receive LIHTC awards between October 1, 2006 and September 30, 2009. A state housing agency is allowed to offer assistance in the form of grants or loans for property.
Secondly, Section 1602 of the Recovery Act allows State housing agencies to elect to receive a cash grant rather than a tax credit of up to 40% of the LIHTC State allocation. The Treasury estimates expenditures for the State is $ 3 billion for 2009. State housing agencies are required to use grants to create sub-awards to finance the acquisition or construction of low-income, eligible buildings, generally subject to LIHTC requirements covered (including leases , income, and use of restrictions on such buildings). Program Section 1602 applies to LIHTC awards made between 1 October 2006 and 30 September 2009. Recent Congress legislation proposes extending the program to 2010 housing loans (see below).
At the end of 2010, the market stabilized as non-traditional investors began to re-fill the investment gap. LIHTC supporters gather around legislative proposals to ensure that investment remains stable both in the short and the future. Harvard University Housing Study Center and the Massachusetts Technology Center for Real Estate have identified potential opportunities to improve LIHTC to be more efficient.
See also
- United States Department of Housing and Urban Development
- United States Treasury Department
- Internal Revenue Service
- Internal Revenue Code
- Housing Finance Agent
- Tax Reform Act of 1986
- HUD USER
- Clearinghouse Regulatory Barrier
External links
- Office of Housing and Urban Development
- List of State Housing Finance Bodies
- HUD USER LIHTC Database
- National Council of State Housing Institutions
- LIHTC Tax Code
- Novogradac & amp; Co. LIHTC database
- LIHTC National Equity Fund
Note
Source of the article : Wikipedia
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