Low-Income Housing Tax Credits

What are LIHTCs?

The Low-Income Housing Tax Credit (LIHTC) is the most successful affordable rental housing production program in U.S. history. It is the federal government’s primary program for encouraging banks and other corporations to invest private equity in the development of affordable, multi-family rental housing for low-income households. The LIHTC program, which Congress established in 1986, has helped to finance 2.4 million affordable rental-residences around the nation.

How do LIHTCs work?

The IRS allocates federal tax credits to state housing finance agencies (HFA), which administer the program (Virginia Housing in Virginia). Sponsors of proposed low-income housing developments apply for allocations of tax credits. If awarded, sponsors use the tax credits to raise equity for developing the project from private investors.

Investors in VCDC-managed funds benefit from the tax credit, which flows over 10 years, and other financial benefits. The combination of tax credits and passive losses reduces the investor’s tax liability, providing the investor a competitive market rate return.

In addition, bank investors receive favorable consideration under the Community Reinvestment Act’s Investment Test for the equity they invest in a LIHTC fund. The equity paid to the project sponsor by the investors reduces the debt burden on the property. This makes it financially feasible to offer the lower, more affordable rents that are required under the LIHTC program.

To learn more about the tax credit program and how VCDC can help you invest or develop in communities you serve, please contact us.