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Thursday, June 7, 2012

An Introduction to the Low-Income Housing Tax Credit

Mark P. Keightley
Analyst in Public Finance

The low-income housing tax credit (LIHTC) program is one of the federal government’s primary policy tools for encouraging the development and rehabilitation of affordable rental housing. These non-refundable federal housing tax credits are awarded to developers of qualified rental projects via a competitive application process administered by state housing finance authorities. Developers typically sell their tax credits to outside investors in exchange for equity. Selling the tax credits reduces the debt developers would otherwise have to incur and the equity they would otherwise have to contribute. With lower financing costs, tax credit properties can potentially offer lower, more affordable rents. The LIHTC is estimated to cost the government an average of nearly $6 billion annually.

The LIHTC program was originally designed to provide a 30% subsidy for rehabilitated rental housing, and a 70% subsidy for newly constructed rental housing. To ensure that the 30% or 70% subsidies were achieved, the U.S. Department of the Treasury designed a formula for determining the LIHTC rate. The formula depends in part on current market interest rates that fluctuate over time. These fluctuations have also caused the LIHTC rate to change over time. Developers and investors have expressed concern over the uncertainty that the variable LIHTC rate changes introduce into the program.

The Housing and Economic Recovery Act of 2008, P.L. 110-289, temporarily changed the credit rate formula used for new construction. The act effectively placed a floor equal to 9% on the new construction tax credit rate. The 9% credit rate floor only applies to new construction placed in service before December 31, 2013. The tax credit rate (known as the 4% credit) that is applied to rehabilitation construction remained unaltered by the act. In the 112th Congress, House and Senate versions of the same proposal (H.R. 3661 and S. 1989) would permanently extend the floor on the 9% credit and provide a similar permanent floor for the 4% credit.

Date of Report: June 1, 2012
Number of Pages: 8
Order Number: RS22389
Price: $19.95

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