Housing Tax Credit Program

The Housing Tax Credit Program (HTC) is a credit or reduction in tax liability each year for 10 years for owners and investors in affordable-income rental housing that is based on the costs of development and the number of qualified affordable-income units.

The tax credit rate is approximately 4% for acquisition costs, 9% for rehabilitation and new construction costs, but only 4% 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% and 70% 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% of its units occupied by rent-restrictive households with incomes under 50% of the area median income, or 40% of its units occupied by rent-restrictive households with incomes under 60% of the area median income. Income limits are adjusted for household size.

To be eligible for Housing Tax Credits, a development must qualify under the federal rules contained in the Internal Revenue Code Section 42. Applicants may apply for the competitive 9% credit funding only during the application cycle. Tax Exempt Bond (4%) financed developments may submit applications year-round.

Maximum Rents

Maximum rents are set for each size of unit, based upon 30% of the area maximum income for specified household sizes. Tenant-paid utilities are counted as part of the rent.

Limit on volume

States can allocate Low-Income Housing Tax Credits based on the state’s population. Only the first year of 10 years of tax credits counts against the state allocation. Developments with tax-exempt financing can receive 4% 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% 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% (70% in special circumstances) above the current eligibility level and the unit can remain qualified.

Non-profit organizations are allocated a minimum of 10% of the annual credit authority each year.

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 Covenant 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.