The Low-Income Housing Tax Credit is a credit against federal income tax liability each year for 10 years for owners and investors in low-income rental housing. The amount of tax credits is based on reasonable costs of development, as determined by THDA, and the number of qualified low-income units.
The tax credit rate is approximately four percent (4%) for acquisition costs, nine percent (9%) for rehabilitation and new construction costs, but only four percent (4%) if the development has federal subsidies or tax-exempt financing. (The actual credit rate is based on prevailing Treasury interest rates to provide a "present value" of 30 percent for acquisition costs and 70 percent for rehabilitation / new construction costs over ten years.) The acquisition credit can only be earned if there is a minimum amount of spending on rehabilitation and, with certain exceptions, if ownership has not changed in the previous ten years. The effective tax credit rate can be 30 percent higher in low income neighborhoods or high cost areas.
The annual credit amount is the lesser of (i) the tax credit rate multiplied by average eligible costs for the number of low-income units or (ii) the amount determined by THDA to be needed to fill the gap between appropriate financing achievable and reasonable development costs. In all cases, tenant incomes and rents must be below stated maximums. Non-depreciable costs, such as land, and the amount of any grant are excluded from eligible costs. THDA also determines the amount of tax credits to be awarded based on its evaluation of submitted applications.
To be eligible, a development must have a minimum of either 20 percent of its units occupied by households with incomes no greater than 50 percent of area median income or 40 percent of its units occupied by households with incomes no greater than 60 percent of area median income. Income limits are adjusted for household size. Maximum rents are established for each size of unit, not to exceed 30 percent of the area maximum income for specified household sizes (utilities are considered part of rent if paid by the owner). All requirements of the relevant qualified allocation plan developed by THDA and approved by the Governor must also be met.
LIHTC Compliance: Developments must remain in low-income use for as long as 30 years. Low-income tenants are protected against eviction or large rent increases under certain circumstances. Land use restrictive covenants must be recorded against the property to insure that the property stays rent restricted and otherwise in compliance with federal tax code and relevant qualified allocation plan requirements for the applicable time period.
Limit on tax credit volume: States can allocate tax credits equal to a total of $2.20, plus the cost of living adjustment specified in Section 42(h)(3)(H) x Tennessee's population. For Tennessee, this provides approximately $14 million in tax credits each year. Only the first year of ten years of tax credits counts against the state allocation. Developments with tax-exempt financing can receive tax credits outside of the state allocation limit. At least ten percent of total credits in each state can only be allocated to non-profit organizations.