An Introduction to the Low-Income Housing Tax Credit Page: 4 of 8
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An Introduction to the Low-Income Housing Tax Credit
Overview
The low-income housing tax credit (LIHTC) was created by the Tax Reform Act of 1986 (PL. 99-
514) to provide an incentive for the development and rehabilitation of affordable rental housing.
These federal housing tax credits are awarded to developers of qualified projects via a
competitive application process administered by state housing finance authorities (HFAs).
Developers either use the credits or sell them to investors to raise capital for real estate projects,
which, in turn, reduces the debt or equity contribution that would otherwise be required of
developers. With lower financing costs, tax credit properties can potentially expand the supply of
affordable rental housing. The LIHTC is estimated to cost the government an average of $9.0
billion annually.'
Two types of LIHTCs are available depending on the nature of the rental housing construction.
The so-called 9% credit is generally reserved for new construction. Each year, for 10 years, a tax
credit equal to roughly 9% of a project's qualified basis (cost of construction) may be claimed.
The applicable credit rate has historically not actually been 9%; instead, the specific rate that a
project would receive was set so that the present value of the 10-year stream of credits equaled
70% of a project's qualified basis.2 The formula that was developed by the Department of the
Treasury to ensure the 70% subsidy was achieved depended in part on current market interest
rates that fluctuated over time. These interest rate fluctuations caused the LIHTC rate to change
over time as well. When interest rates were relatively low, the 70% subsidy could be achieved
with a lower credit rate than when interest rates were relatively high. Since 1986, the 9% credit
has ranged between 7.35% and 9.27%.3
Beginning in 2008, a temporary "floor" was placed under the credit for new construction so that
the rate could not fall below 9%. In 2015, the 9% floor was permanently extended. Thus, new
construction receives a credit rate equal to the greater of the rate determined under the original
Treasury formula, or 9%. See the "Recent Legislative Developments" section for more
information on the 9% floor.
The so-called 4% credit is typically claimed for rehabilitated housing and new construction that is
financed with tax-exempt bonds.4 Like the 9% credit, the 4% credit is claimed annually over a 10-
year credit period. The actual credit rate fluctuates around 4%, but is set by the Treasury to
deliver a subsidy equal to 30% of a project's qualified basis in present value terms. At one point,
the 4% credit rate had fallen to as low as 3.15%.5 For both the 4% and 9% credit it is the subsidy
1 Computed as the average estimated tax expenditure associated with the program between 2016 and 2020. U.S.
Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2016-2020,
committee print, 115w Cong., 1"s sess., January 30, 2017, JCX-3-17.
2 The concept of present value is used when it is necessary to value a stream of money that is expected to be received
over time. Because of the ability to earn a return on money received sooner rather than later, money received in the
future is less valuable than money received today. The present value concept accounts for this "time value of money"
by discounting money expected to be received at different points in time. Usually, discounting is carried out using an
interest rate because interest rates measure the time value of money.
3 The lower bound of this range is the rate that would have prevailed in absence of the 9% credit floor. U.S. Department
of the Treasury, Internal Revenue Service, Revenue Ruling 2012-24, Table 4, Appropriate Percentages Under Section
42(b)(2)for September 2012, Internal Revenue Bulletin 2012-36, September 4, 2012, and Novogradac & Company
LLP, "Appendix H: List of Monthly Credit Percentages," in Low-Income Housing Tax Credit Handbook, 2006 ed.
(2006), p. 845.
4 A developer using federal tax-exempt bonds can qualify for the 9% credit if they reduce the project's eligible basis by
the amount of the tax-exempt bond subsidy.
5 U.S. Department of the Treasury, Internal Revenue Service, Revenue Ruling 2012-24, Table 4, Appropriate
(continued...)Congressional Research Service
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Keightley, Mark P. An Introduction to the Low-Income Housing Tax Credit, report, May 31, 2017; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc1043172/m1/4/: accessed April 19, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.