LIHTC: Its Past and Current Main Attributes


The Low-Income Housing Tax Credit program (LIHTC or Lie-Tech) was created in 1986 by the Tax Reform Act of 1986 and signed into law by President Ronald Reagan. It has soon ripened into the federal government’s largest program for the development and restoration of affordable housing. The program invests over $6 billion dollars each year to produce 150,000 rental residential units and 100,000 jobs. So far, the program has enabled the rehabilitation of 2.5 million housing units. Between 1987 and 2005, the program allocated over $7.5 billion in tax credits. According to the U.S. General Accounting Office, if all of the tax credits awarded for a 10-year period were used by investors, the LIHTC program would have an annual cost of over $3 billion.

The LIHTC program was envisaged as an instrument to channel private investment in the development of inexpensive rental units as well as to  promote the private housing market to take part in and bring desired efficiency to the development of such housing. Since its inception, the LIHTC program has experienced a tremendous increase. In 1987, for instance, the tax credit allotment per unit of housing was $1,822 while in 2005, the allotment per unit was $8,670. It is obvious from such an increase that the program has grown to cost the government a substantial sum in terms of forgone tax revenue. Today, it is frequently perceived as a useful instrument after disasters and hurricanes. For instance, the LIHTC program was used to finance 27,000 homes after hurricanes Katrina and Rita.

LIHTC and the Internal Revenue Service

The LIHTC is administered by the Internal Revenue Service with individual state housing finance agencies or housing authorities who are in charge for allocating the credits. The IRS allocates tax credits annually to state housing finance agencies based on the state’s population. The current national allocation rate to states is $2.00 per person.

Qualified Allocation Plan

State housing entities are also responsible for developing an individual Qualified Allocation Plan (QAP) that delineates the process of projects selection and the allocations of the credits. It is interesting that that QAP allows every state to focus on its individual affordable housing needs and focus on the growth of affordable housing in areas that demand such help. Thus, a state’s QAP can function as an instrument that can address the state’s affordability crisis. States choose to use the plan in order to award points and rate project applications based on the extent to which the proposal corresponds state affordable housing objectives.

Both for-profit and non-profit developers are entitled to offer proposals in the program. States are under federal regulation to allocate at least 10% of its credit for housing projects developed by non-profit entities. In reality, however, many states allocate higher sums. The submissions are required to be for the rehabilitation or development of affordable rental housing. When the project is approved, tax credits are allocated by State housing entities. These are then retailed to private investors in order to be used against their federal tax bill.  Though this program, for every dollar of investment, private investors receive a $1.00 credit towards their tax liability. Investors have a period of 10 years over which to use the credits. The funds generated from the sale of the tax credits are used towards the financing of the housing project.

LIHTC and the Role of Syndicators

The partnering of projects with investors is typically handled by a “syndicator”.  The role of syndicator is to help overcome the divide between the parties in the operations of affordable housing. Syndicators normally group a number of projects into one collection and then market such portfolios to potential investors. Sydicators furthermore determine low-income projects in which capital will be invested. The payment to the syndicators comes out of the allocated tax credits. So, while an investor may, for example, give $2.00 towards a project, it is not the entire amount of two dollars that goes into the project’s capital. After the fees to the syndicator are subtracted, the portion that remains goes towards the project itself. It was determined that approximately $.70 of each dollar funded goes into the project. The quantity of tax credits allocated by a State housing entity to a project is a calculation-based formula that incorporates factors such as the total number of participating low-income units, the total cost of the project and the area of the project.

What is Eligible Basis?

The initial step in ascertaining tax credits is the calculation of the project’s so called “eligible basis”. This basis represents the total project costs without the cost of land. Such costs are grouped into hard and soft costs. The example of hard costs is the cost of construction, while the example of soft cost is the engineering cost and utility fee. If a project is located in either a Difficult Development Area or a Qualified Census Tract, it will receive a 30 per-cent raise in its “eligible basis”. The two areas are defined as regions whose social  and economic character produces higher development costs.

DDAs, for example, are areas with higher land and utility costs relative to the area median income (AMI) while a QCT is a tract in which 50 percent of the households have incomes that are less than 60 percent of area’s gross median income.  The eligible basis is multiplied by the percent of units that belong to low-income households to produce the qualified basis. The credit allocation is determined on that qualified basis.


  1. Advisors, R. Inc., The Low Income Housing Tax Credits (LIHTC) Effectiveness and Efficiency: A Presentation of the Issues, 57 (2002).
  2. Buron, L., Nolden, S., Heintz, K., & Stewart, J. (2000). Assessment of the economic and social characteristics of LIHTC residents and neighborhoods.
  3. Eriksen, M. D., & Rosenthal, S. S. (2010). Crowd out effects of place-based subsidized rental housing: New evidence from the LIHTC program. Journal of Public Economics, 94(11), 953-966.
  4. Khadduri, J., Buron, L., & Lam, K. (2004, October). LIHTC and Mixed Income Housing: Enabling Families with Children to Live in Low Poverty Neighborhoods?. In Association of Public Policy and Management 26th Annual Research Conference.
  5. Kingsley, G. T. (1997). Federal housing assistance and welfare reform: Uncharted territory.

Tweet about this on TwitterShare on Google+Share on LinkedInShare on RedditShare on FacebookPin on PinterestDigg thisShare on StumbleUponEmail this to someone

Speak Your Mind