To be eligible for consideration under the LIHTC Program, a proposed project must:
- Be a residential rental property.
- Commit to one of two possible low-income occupancy threshold requirements.
- Restrict rents, including utility charges, in low-income units.
- Operate under the rent and income restrictions for 30 years or longer, pursuant to written agreements with the agency issuing the tax credits.
Residential Rental Property
Typical rental properties that are eligible under HOME will also be eligible under LIHTC. However, the LIHTC program is not as flexible as the HOME program concerning service-enriched housing, or concerning group homes and transitional housing.
The LIHTC program requires that rehab be performed, if the developer is acquiring an existing building. Tax credits may be earned on the acquisition of an existing development provided the owner meets the 10-year previous ownership rule. This rule states that the property to be acquired must not have changed ownership and been placed in service during a 10-year period prior to the acquisition. A building that has not been used in ten or more years can claim the acquisition credit even if its ownership has changed, given that it has not been placed in service during that period.
Occupancy Threshold Requirements
Projects eligible for housing tax credits must meet low-income occupancy threshold requirements. Project owners may elect one of the following two thresholds:
- 20-50 Rule: At least 20 percent of the units must be rent restricted and occupied by households with incomes at or below 50 percent of the HUD-determined area median income (adjusted for household size).
- 40-60 Rule: At least 40 percent of the units must be rent restricted and occupied by households with incomes at or below 60 percent of the HUD-determined area median income (adjusted for household size).
The 20-50 Rule is conceptually similar to - although not exactly the same as - a 20 percent Low HOME requirement. Similarly, the 40-60 Rule is comparable to a 40 percent High HOME requirement.
Typical state QAPs encourage applicants to provide more than the minimum number of affordable units, and to provide greater than the minimum level of affordability. Moreover, credits are available only for the affordable units. As a result, many applications provide for 100 percent of the units to be affordable, and many applications provide for some units to be affordable well below 50 percent of AMI.
The rent for each unit is established so that tenant monthly housing costs, including a utility allowance, do not exceed the applicable LIHTC rent limit. These limits are based on a percentage of area median income, as adjusted by unit size. Of course, rents cannot exceed local market limits.
It is important to note that the LIHTC Program restricts only the portion of the rent paid by the tenant, not the total rent. As a result, certain rental assistance programs can be used to raise the total rent above the LIHTC rent limit. For example, project-based Section 8 contract rents can exceed the LIHTC limit, but tenant-based Section 8 contract rents cannot.
View an example of how LIHTC rents are determined. View how to calculate LIHTC income and rent levels for your county.
The LIHTC program requires a minimum affordability period of 30 years (i.e., a 15-year compliance period and subsequent 15-year extended use period). Some states require a longer affordability period for all LIHTC properties, and other states may negotiate longer affordability periods on a property-specific basis. Tenant incomes are recertified annually to ensure their continued eligibility. The allocating agency is responsible for monitoring compliance with the provisions during the affordability period and must report the results of monitoring to the IRS.