The Low-Income Housing Tax Credit (LIHTC) program is a federal government initiative which gives designated agencies authority over a roughly $8 billion budget for the purpose of providing tax credits for the acquisition, rehabilitation, or construction of rental housing for lower-income households. Enacted as a part of the Tax Reform Act of 1986, the LIHTC program is meant to incentivize developers to create low-income housing by offering a 10-year credit on federal income tax. Without the incentive, affordable rental housing projects would not be as appealing to multifamily investors, since they otherwise might not generate sufficient profit to justify investment.

LIHTCs help fund the new construction and rehabilitation of a variety of different property types, including traditional apartments, single-family homes, and two- to four-unit multifamily properties (think duplexes or triplexes). In addition, LIHTCs can fund the conversion of structures like schools, warehouses, and motels into multifamily properties. Properties using these credits must generally cap rents for some or all of the units at a certain percentage of a location’s area median income, or AMI.

The Low-Income Housing Tax Credit (LIHTC) is used to either construct new rental buildings or renovate existing buildings. There are two annual tax credits available for HUD multifamily financing. The credit received depends on the nature of the project:

• 4% tax credit (30% subsidy): For acquisition of existing buildings for rehabilitation and new construction financed by tax-exempt bonds.
• 9% tax credit (70% subsidy): Generally for new construction and substantial rehabilitation with no federal subsidies.

For 10 years, either a 4% or 9% tax credit can be claimed. The percentages are roughly equivalent to 4% or 9% of the project’s construction cost. The Internal Revenue Code (IRC) does not specify the tax credits (4% or 9%). Instead, the subsidy levels (30% and 70%) are stated in the IRC.

A LIHTC can subsidize either 30 percent or 70 percent of the costs to create low-income units in a development project. A 30% subsidized LIHTC, also referred to as a 4% LIHTC, is typically used for property acquisition and rehabilitation, while the 70% subsidized LIHTC, or 9% LIHTC is usually reserved for new construction.

Investing in 4% and 9% LIHTC credits can provide a number of benefits. The 4% tax credit (30% subsidy) is for the acquisition of existing buildings for rehabilitation and new construction financed by tax-exempt bonds. This can provide a lower cost of financing for the project. The 9% tax credit (70% subsidy) is usually for new construction and substantial rehabilitation without federal subsidies. This can provide a higher level of subsidy for the project. Both tax credits can be claimed for up to 10 years, providing a long-term benefit to the investor. Source

In order to qualify for the LIHTC program, a building must reserve a certain number of units for low-income residents. In most cases, they must either follow one of two “rules”: the “20/50 rule” or the “40/60 rule.” The 20/50 rule requires that at least 20% of a property’s units be rented to tenants who earn 50% or less of the area median income (AMI), while the 40/60 rule requires that at least 40% of a property’s units be rented to tenants who earn 60% or less of the AMI.

The 4% tax credit (30% subsidy) is for the acquisition of existing buildings for rehabilitation and new construction financed by tax-exempt bonds. The 9% tax credit (70% subsidy) is usually for new construction and substantial rehabilitation without federal subsidies. Either tax credit can be claimed for up to 10 years.

The percentages are approximately equivalent to 4% or 9% of the project’s construction cost. The Internal Revenue Code specifies the subsidy levels (30% and 70%), not the tax credits (4% or 9%).

The LIHTC subsidizes a percentage of costs in a low-income unit project, either 30% or 70%. As a result, the program provides 30% of a project’s cost of construction (the 4% credit), and 70% a project’s cost of construction (the 9% credit). Since its inception, the rates have fluctuated based on market activity. The applicable tax credit rates have historically not actually been 4% and 9%. Instead, the rates for FHA multifamily financing have fluctuated in response to market interest movements, falling near 4% and 9%. A floor for the 9% tax credit was set in 2008, a rate below which the 9% credit cannot fall.

Investing in 4% and 9% LIHTC credits can provide tax benefits to investors. The 4% tax credit (30% subsidy) is for the acquisition of existing buildings for rehabilitation and new construction financed by tax-exempt bonds. The 9% tax credit (70% subsidy) is generally for new construction and substantial rehabilitation with no federal subsidies. The Internal Revenue Code specifies the subsidy levels (30% and 70%), not the tax credits (4% or 9%).

For more information on the tax implications of investing in 4% and 9% LIHTC credits, read Mark P. Keightley’s report, Congressional Research Service.