The Low-Income Housing Tax Credit (Housing Credit, or LIHTC) is a model public-private partnership built on a “pay-for-success” model. The federal government awards credits only after properties are successfully completed and occupied, and can recapture credits for non-compliance. Private sector investors – not taxpayers – bear the financial risk, and are closely involved in monitoring and oversight. The Housing Credit (LIHTC) is also administered at the state level, and through a competitive allocation process. Only the affordable housing developments that are most responsive to local housing priorities receive credits.
The Housing Credit (LIHTC) is responsible for financing nearly all affordable housing development in the U.S. Housing simply costs too much to build for owners to charge rents that are affordable to low-income households without an incentive like the Housing Credit (LIHTC).
How the Housing Credit (LIHTC) Works
- The Federal Government funds the program.
The Department of the Treasury issues tax credits to states and requires that housing built by this program remain affordable for at least 30 years. But the states largely shape what housing gets built. States control the type of housing, location and other characteristics to best serve their residents. State agencies write regulations describing the selection criteria that governs the competition. Then they rate the developers’ applications and award the tax credit allocations.
- Developers receive capital for construction costs.
Enterprise and other companies, called "fund managers" or "syndicators," create funds to pool investor capital. Enterprise uses these funds to purchase the tax credits from the developer for an equity stake in the housing development. With the capital from the investor, developers can limit the money borrowed to fund construction, reducing both the amount of debt and rent levels.
- Low-income renters get an affordable home.
Housing Credit (LIHTC) properties must be rented only to families whose income is at or less than 60 percent of the area median income. Tenants’ rent payments are limited to 30 percent of their income.
- Investors purchase a 10-year tax credit.
Investors’ equity stake in the housing developments can result in yields and the opportunity to revitalize the communities in which they work and live.
Supporting the Housing Credit
Comprehensive tax reform was a top priority for the 115th Congress and the Trump Administration, and on December 22, 2017, President Trump signed the Tax Cuts and Jobs Act into law. The bill retained the Housing Credit (LIHTC) as well as private activity bonds, including multifamily Housing Bonds, which finance roughly half of all Housing Credit developments. While the inclusion of these critical affordable housing financing tools was a major advocacy success and a testament to the programs' strong track record, the new tax system presents concerns for future affordable housing production.
One of Enterprise's top priorities in the 116th Congress is to continue advocating to expand and strengthen the Housing Credit through the Affordable Housing Credit Improvement Act. This legislation will not only restore affordable housing production in light of the Tax Cuts and Jobs Act, but make a meaningful step towards addressing our nation's vast and growing shortage of affordable housing.
Visit the ACTION Campaign website for the latest news on the Housing Credit, advocacy tools and other Housing Credit resources.