Low-Income Housing Tax Credit: What is it and How to Pass Inspections?

Low-Income Housing Tax Credit: What is it and How to Pass Inspections?

Posted on 02. Jul, 2012 by in Business

One of the fastest growing segments of the rental housing market is low-income, affordable housing. Since the Tax Reform Act of 1986 there have been government-sponsored tax incentives for the utilization of private equity in the development of low-income rental housing designed for Americans who qualify as “low-income”.

As of 2011, the federal government’s defining level for classification as “low income” for one person, three person and six person households are $10,890, $18,530 and $29,990, respectively. The Low Income Housing Tax Credit (LIHTC) is a dollar-for-dollar tax credit available in the U.S. for affordable housing investments, this according to Wikipedia. Investors and property managers will find many opportunities in the months and years ahead to participate in the low-income housing rental market. That’s why it’s both important and worth the effort to know about the LIHTC program and what it entails. This includes knowing how to pass the LIHTC inspections that are part of the process.

Did you know that LIHTC accounts for the majority (approximately 90 percent) of all affordable rental housing that’s built in America today? The credits are also commonly called Section 42 credits in reference to the applicable section of the I.R.S. code. The program offers credits on federal tax liabilities for 10 years. Individuals, corporations, partnerships and other legal entities may benefit from these tax credits, subject to certain restrictions.

The LIHTC Program may seem complicated, but many local housing and community development agencies are effectively using these tax credits to increase the supply of affordable housing in their communities. I’d encourage every property manager and potential owner-investor to study the federal government fact page at the HUD website. You’ll learn all the details about eligibility, and you can even learn how to use the process referred as “syndication” which allows groups of investors to participate.

When you’re operating and offering low-income housing and have claimed the LIHTC tax credits you’re most likely to be called upon by state housing agency inspectors to make sure you’re in compliance. If and when your state housing finance agency comes to inspect your properties, you need to be ready. This applies to Section 8 rental housing as well. The National Association of Home Builders (NAHB) has a very helpful section with a webinar titled “Getting Physical: Passing the LIHTC Property Inspection”.

This webinar includes speakers who discuss the deficiencies that property owners are most likely to be cited for and how to remedy them before the inspection. You’ll also learn what crucial pieces of information to have available for inspectors and several other preparation tips that will help avoid the most common citations. I’d encourage rental property managers and their clients to become familiar with the NAHB web site and all its informative sections.

Expanding the property management business to encompass the low-income housing market is an excellent idea in today’s beleaguered economy. Even though we want to believe that the economy is improving, the number of people with reduced incomes and in need of affordable housing is growing rapidly. That’s why this topic is so timely and can be a good starting point for a conversation with your best clients and prospective clients. Know the opportunities and the advantages they offer.

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