What Is a Tax Credit Apartment? An Overview

affordable housing property management

A tax credit property provides affordable housing to low-income families and individuals, with the property owner participating in the federal Low-Income Housing Tax Credit (LIHTC) program.  

Through LIHTC, landlords can claim tax credits over a ten-year period by offering units at reduced rates to low-income tenants. Eligible structures include apartment buildings, single-family homes, townhouses, and duplexes. Established under the 1986 Tax Reform Act, the program aims to incentivize private investors to construct housing for low-income populations, addressing a significant shortage of affordable housing options for these demographic groups. 

Tax Credit Apartment

A tax credit property is a residential development owned by a developer or landlord involved in the federal Low-Income Housing Tax Credit (LIHTC) program. This initiative allows property owners to receive tax credits in exchange for offering rental units to low-income individuals or families at below-market rates.  

Under the LIHTC program, property owners commit to renting a portion or all their units to qualifying low-income tenants, who pay reduced rents. The program’s impact is significant, having facilitated the provision of 3.44 million affordable housing units for low-income earners from 1987 to 2020, as reported by the U.S. Department of Housing and Urban Development. 

By participating in LIHTC, developers and landlords not only contribute to community welfare by expanding access to affordable housing, but also benefit from tax incentives that support their investment in these vital housing projects. 

LIHTC Definition 

The Low-Income Housing Tax Credit (LIHTC) aims to stimulate the construction of affordable housing by offering developers a ten-year tax incentive. This program reduces developers’ expenses in exchange for reserving a portion of rental units for lower-income families.  

Eligible properties include single-family homes, multi-family buildings, apartment complexes, and townhouses. To qualify, LIHTC projects must rent to tenants with incomes below the area’s median and maintain this affordability commitment for upcoming years. The LIHTC program is a significant federal expenditure, costing the U.S. government approximately $13.5 billion annually. 

How Tax Credit Properties Work 

The LIHTC program enhances the affordability for low-income tenants by subsidizing property owners. This initiative allows owners to receive tax credits for acquiring, constructing, or rehabilitating rental housing that meets affordability criteria. By leveraging these credits, property owners can offer reduced rents, making housing more accessible to low-income individuals and families across various types of residential units. This program plays a crucial role in fostering community development and ensuring that affordable housing options are easily available. 

How the Program Works 

The tax credit program for affordable housing operates through a structured process governed by federal and state agencies, as explained below: 

  1. Allocation of Tax Credits: Tax credits are distributed by the federal government to state housing finance agencies, with allocations determined by a formula linked to each state’s population. This strategy aims to stimulate nationwide development of affordable housing. 
  2. State Determination of Needs: Each state housing agency assesses specific affordable housing requirements. This evaluation considers population demographics, income levels, and housing availability within the state. 
  3. Developer Application: Developers interested in constructing affordable housing projects apply for these tax credits through the state housing agency. Applications are competitive and evaluated based on how well they address the identified housing needs of the state. 
  4. Credit Sale to Investors: Upon receiving tax credits, developers typically sell them to private investors to raise funds for their construction projects. These investors, often financial institutions or corporations, purchase the credits at a discounted rate in exchange for providing upfront capital. 
  5. Claiming Tax Credits: Once the affordable housing units are built and occupied, the property owner can claim the tax credits over a period of 10 years. This process involves reducing their federal tax liability and providing a financial incentive for investing in affordable housing. 
  6. Affordability Requirements: To ensure long-term affordability, properties must remain designated as affordable housing for a minimum of 15 years from the initial compliance period. Often, a second 15-year affordability period is required, extending the commitment to maintaining these units as affordable for 30 years. 

How Property Owners Qualify for the Credit 

Property owners (whether developers or investors) must meet either of the following specifications to qualify for the tax credit. The specifications include: 

  • Income Criteria 

The property must adhere to one of the following requirements: 

  1. At least 20% of units must accommodate renters earning 50% or less of the area median income (AMI). 
  2. At least 40% of units must accommodate renters earning 60% or less of AMI. 
  3. At least 40% of units must accommodate renters with an average income not exceeding 60% of AMI, and no units can accommodate renters with incomes exceeding 80% of AMI. 
  • Gross Rent Criteria 

  1. Rent levels are set to ensure affordability, typically not exceeding 30% of either 50% or 60% of the Area Median Income (AMI), depending on the proportion of tax credit rental units within the project. 
  2. The project must consistently meet rent and income requirements for 15 years to maintain tax credit eligibility. An additional 15-year compliance period extends the total commitment to 30 years unless regulatory relief is sought, with some states possibly requiring longer periods. 

The Bottom Line 

A tax credit apartment managed by Beach Front Property Management offers affordable housing solutions supported by LIHTC. These properties, which include various residential types like apartment complexes and single-family homes, cater to low-income families and individuals.  

BFPM excels in managing affordable housing, ensuring compliance with federal and state regulations while delivering exceptional service to tenants and owners. With LIHTC expertise, BFPM helps property owners maximize tax credits and maintain long-term affordability. 

For further queries, contact us at BFPMInc. 

Trevor Henson

Trevor Henson is an experienced entrepreneur (10+ highly-successful start-ups) and property investor with a demonstrated history of building and leading teams in investment property management environments, maximizing returns for property owners, and optimizing properties through construction management and re-positioning. He…
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Frequently Asked Questions(FAQs)

Tax credits can lower your tax liability. If you pay rent for housing, have a family with children, or support low-income college students financially, you might qualify for one or more tax credits.

To qualify for the California Earned Income Tax Credit (CalEITC), the amount you receive is based on your income and family size, offering potential cash back or tax reductions. Eligibility requires meeting these criteria for the tax year:

  • Be at least 18 years old or have a qualifying child
  • Have earned income ranging from $1.00 to $30,950
  • Possess a valid Social Security Number or Individual Taxpayer
  • Identification Number (ITIN) for yourself, your spouse, and any qualifying children
  • Reside in California for more than half of the filing year