How it Works
The LIHTC provides funding for the development costs of low-income housing by allowing a
taxpayer (usually the partners of a partnership that owns the housing) to take a federal tax
credit equal to a large percentage of the cost incurred for development of the low-income
units in a rental housing project. Development capital is raised by "syndicating" the credit
to an investor or, more commonly, a group of investors. To take advantage of the LIHTC, a
developer will typically propose a project to a state agency, seek and win a competitive
allocation of tax credits, complete the project, certify its cost, and rent-up the project
to low income tenants. Simultaneously, an investor will be found that will make a "capital
contribution" to the partnership or limited liability company that owns the project in
exchange for being "allocated" the entity's LIHTCs over a ten year period. The amount of
the credit will be based on (i) the amount of credits awarded to the project in the
competition, (ii) the actual cost of the project, (iii) the tax credit rate announced by
the IRS, and (iv) the percentage of the project's units that are rented to low income tenants.
Failure to comply with the applicable rules, or a sale of the project or an ownership interest
before the end of at least a 15-year period, can lead to recapture of credits previously taken,
as well as the inability to take future credits.