The tax credit rate is approximately 4 percent for acquisition costs and 9 percent for rehabilitation and new construction costs, but only 4 percent if a development has federal subsidies or tax-exempt financing. The actual credit rate is based on prevailing Treasury interest rates to provide a "present value" of 30 percent and 70 percent respectively over 10 years. The acquisition credit can only be earned if there is a minimum amount of rehabilitation spending and, with certain exceptions, if ownership has not changed in the previous ten years.
The annual credit amount is the credit rate multiplied by average eligible costs for the number of income restricted units where tenant incomes and rents are below stated maximums. Non-depreciable costs, such as land, and the amount of any grants are excluded from eligible costs. Additional units that qualify after the first year earn two-thirds of the annual credit amount for the balance of the 15 - year compliance period.
Eligibility: A development must have a minimum of either 20 percent of its units occupied by rent-restrictive households with incomes under 50 percent of area median income, or 40 percent of its units occupied by rent-restrictive households with incomes under 60 percent of area median income. Income limits are adjusted for household size.
Maximum rents are set for each size of unit, based upon 30 percent of the area maximum income for specified household sizes. Tenant-paid utilities are counted as part of the rent. Developments must maintain rent restrictive use for at least 15 years, and rent restrictive tenants are protected against eviction or large rent increases for an additional 3 years. Land Use Restrictive Covenants must be recorded against the property to insure that the property stays rent restricted for an extended use period of an additional 15 years, at a minimum, in accordance with IRC Section 42.
Limit on volume: States can allocate credits up to a total of $1.95 per resident for 2007. Only the first year of 10 years of tax credits counts against the state allocation. Developments with tax-exempt financing can receive tax credits outside of the state allocation limit.
State and local housing credit agencies select developments through adopted allocation plans, which must include certain priorities and criteria for selecting developments. An agency must award only the amount of tax credits a development needs to be financially feasible.
Unallocated credits can be used in the following year. Developments can be completed up to two years after the allocation year ends, if 10 percent of development costs are spent by the end of the allocation year.
Recapture of some credits can occur if the number of qualified rent restrictive units is not maintained for 15 years, or upon changes in ownership. Household income can increase up to 40 percent (70 percent in special circumstances) above the current eligibility level and the unit can remain qualified.
Non-profit organizations are allocated a minimum of 10 percent of total credit authority in each state.
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