IRS Section 42
Low Income Housing Tax Credit

Summary:

The Low-Income Housing Tax Credit (LIHTC) is a federal incentive program fueling the development and rehabilitation of affordable housing for eligible Americans. Developers obtain tax credits for creating affordable housing units, they then can sell these credits to investors for a financing boost. These credits are available for 10 years after the creation of the affordable housing unit. The LIHTC requires a minimum unit or square footage requirement to qualify. The tax credit, claimed pro rata over 10 years, is designed to subsidize either 70% or 30% (also considered 9% or 4%) of the qualified expenditures of the project.

Date in Effect:

1986 - No expiration date

Calculation Details:

Internal Revenue Service Section 42 has a complex breakdown to calculate the tax. The formula with definitions is as follows;

  • Determine the “eligible basis”

    • Costs must be depreciable to be considered for the eligible basis. The eligible basis includes all "hard" and most depreciable "soft" costs during construction.

  • Determine the “applicable fraction” and the “qualified basis”

    • The applicable fraction = (sq.ft. designated low-income/total sq.ft.) OR (# of units designated low income/total # of units)

    • Qualified basis = applicable fraction * eligible basis.

  • Determine the “applicable percentage”

    • The project is available for a 9% or a 4% tax subsidy. The applicable credit is determined by the type of project (new construction or renovation). Also taken into consideration is whether additional subsidies are used during financing.

    • A 4% credit is available for projects where an existing building is purchased to be renovated and/or there are additional subsidies used.

    • A 9% credit is available for new construction projects not using additional subsidies

  • Maximum LIHTC = (qualified basis * applicable percentage)

    *A 30% “basis boost” is available for developments located in Difficult Development Areas (DDAs) and Qualified Census Tracts (QCTs)

    *LIHTC is used as state funds are available. Applicable percentages are subject to change.

Filing Requirements:

  • Completion of IRS Form 8609 Register and obtain unique “identifier number” from the Internal Revenue Service

  • File tax return for self, or if transferring the credit for cash, then reflect the sale on both buyer and seller’s tax return

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