The need for decent, affordable rental housing in many areas continues to be high, with two-thirds of households that are in need are renters. With current constraints on federal and state budgets, there is little prospect for significant new funding for rental housing production. The Low Income Housing Tax Credit (LIHTC) enables owners and investors of affordable rental housing to receive a credit applied directly against their federal tax liability if they agree to restrict the income and rent of tenants over a period of 15 years. The credit is actually a percentage of eligible costs associated with the construction or acquisition and rehabilitation of the affordable apartments. This credit is available to the taxpayer/owner each year for ten years. Once the property is occupied, the annual credit is fixed and does not depend on results of annual operations.

In order for the owner to be eligible for tax credit, the income of tenants can be no greater than 60% of area median income, adjusted for family size. The income limits for each area of the state are published each year by the federal government.

Failure to remain in compliance for at least 15 years may result in a recapture of a portion of current and prior year credit (with interest) although certain rules allow flexibility in the program so as to avoid recapture events from taking place. The credit is allocated by allocating agencies designated by the IRS. In Michigan, it’s the Michigan State Housing Development Authority (hot link) and in Indiana, it’s the Indiana Housing Finance Authority. (hot link)

In the watershed Tax Reform Act of 1986, however, Congress encouraged the participation by the private sector in the development of affordable housing by creating a new incentive for owners and investors in such housing - The Low Income Housing Tax Credit (Tax Credit). The Tax Credit program, permanently extended in the tax bill signed into law in August, 1993, promotes private investment in affordable housing by reducing investors’ federal tax liability and permitting a competitive rate of return on investment. Since the program’s inception in 1987, the overwhelming majority of affordable rental apartments built throughout the United States have been made possible because of the Tax Credit program.