Low-Income Housing Tax Credit

The Low-Income Housing Tax Credit (LIHTC) is a program to assist private developers and non-profit organizations to construct or rehabilitate affordable rental units. Through this program, tax credits may be obtained for 10 years to reduce federal and state income tax liability, or a developer may sell the credits to obtain equity in a project.

The LIHTC program can be combined with other federal and state programs to develop low-income housing. The LIHTC program was created by the 1986 Tax Reform Act. It can apply to as much as 50 percent or more of the cost of a project.

The tax credit works by allocating up to $1.75 per state resident, which in Tennessee provides approximately $10 million in tax credits each year through the Tennessee Housing Development Authority. A tax credit deal is understood primarily only by tax attorneys or others who specialize in this area. The Low-Income Housing Tax Credit is quite complex. To understand more information than is presented in this introduction, please refer to the THDA website.

The LIHTC is available to any entity that can benefit from tax credits, and it applies only to affordable housing in which at least 20 percent of households having income of 50 percent or less of area median income or 40 percent of households having an income of 60 percent or less of area median income. HUD establishes the area median income each year, and low-income rents (which include utilities) are restricted based on size of the unit (i.e., number of bedrooms) and the area median income.

The project must maintain these restrictions on rent for a minimum of 18 years. Each year the entity that owns the property must verify the income status to make sure they still qualify. The LIHTC applies to buying/rehabilitating or building low-income property. Up to 9 percent of these costs (not including purchase of land) can be used for the tax credit and it can apply for each year in a 10-year period.

If an owner is constructing new units with tax-exempt financing, the tax credit is 4 percent instead of 9 percent.

To apply for LIHTC in Tennessee, contact the THDA. Technical assistance is available to assist entities in applying.