Overview: Low Income Housing Tax Credit

The low-income housing credit is claimed annually over a ten-year credit period, unlike other credits which are claimed all at once. Thus, you will have to file a completed Form 8586, Low-Income Housing Credit, with your federal income tax return for each tax year you claim the credit.

The credit percentages are set so that over the ten year period, the credits will equal a present value of 70% of the basis of a new building which is not federally subsidized, and 30% of the basis of an existing building or federally subsidized new building. Rehabilitation expenditures qualify for the credit only if they exceed a per-unit minimum amount ($6,200 for expenditures treated as placed in service for calendar year 2012, $6,100 for calendar year 2011, as adjusted for inflation). A 9% minimum credit rate applies to certain new non-federally subsidized buildings placed in service after July 30, 2008 and before Dec. 31, 2013.

A higher credit is allowed for buildings located in certain high cost areas.

A building qualifies for the credit if either: 20% of the units are occupied by individuals with incomes of 50% or less of area median income, or at least 40% of the units are occupied by individuals with income of 60% or less of area median income.

Further, the rent charged to tenants can't exceed 30% of the “imputed income limitation” applicable to the unit in which those tenants live. That limitation is the income limitation applicable to individuals occupying the unit if (a) only one individual occupies the unit where the unit doesn't have a separate bedroom or (b) not more than 1.5 individuals occupy each separate bedroom in the case of a unit that has one or more separate bedrooms.

These requirements must be satisfied over a fifteen year period known as the compliance period. In addition, no credit is allowed with respect to any building for a tax year unless an extended low-income housing commitment is in effect at the end of that year. An “extended low-income housing commitment” is any agreement between the building owner and the relevant state housing credit agency that includes a number of required provisions. The penalty for noncompliance is recapture of the credit (i.e. loss of the credit previously allowed).

There is a limit on the total amount of credits available for buildings not financed with tax-exempt bonds subject to certain state volume limitations. Each state is permitted to annually allocate low-income housing credits with a ceiling amount, for calendar year 2012, equal to the greater of (1) $2.20 multiplied by the state population or (2) $2,525,000. For calendar year 2011, the ceiling amount was equal to the greater of (1) $2.15 multiplied by the state population or (2) $2,465,000. At least 10% of this ceiling amount must be reserved for projects developed by certain nonprofit organizations. Buildings financed with tax-exempt bonds are eligible for the credit without regard to the state ceiling, since these bonds are subject to other limitations.