Low Income Housing Tax Credits


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LOW INCOME HOUSING TAX CREDITS

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Helping to Create Affordable Housing

As part of the Tax Reform Act of 1986, the United States Congress created the Low-Income Housing Tax Credit (Section 42) to promote development of affordable rental housing for low-income individuals and families. To date, it has been the most successful rental housing production program in Nebraska, creating thousands of well-managed residences with very affordable rents. The Low-Income Housing Tax Credit, rather than a direct subsidy, encourages investments of private capital in the development of rental housing by providing a credit to offset an investor's federal income tax liability. The amount of credit a project owner may claim is directly related to the amount of qualified development costs incurred and the number of low-income units developed that meet the applicable federal requirements for both tenant income and rental rates.

The Nebraska Investment Finance Authority (NIFA) is designated as Nebraska's housing credit allocation agency. Not only is it part of NIFA's mission to finance housing for the people of Nebraska, our statutory authority enables us to provide a broad range of financial resources for agricultural, residential, manufacturing, medical and community development endeavors. We also provide technical assistance for activities related to these areas. And because NIFA is self-funding, we use no Nebraska tax dollars to accomplish our mission.


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What is a Low - Income Housing Tax Credit?

A low-income housing tax credit is a dollar-for-dollar reduction or credit against an investor's federal income tax liability on ordinary income (i.e. salaries, wages, business). The credit is treated like a cash payment or as a reduction against the amount of tax owed. Only the owners or investors in a tax credit property may utilize the benefits of the tax credit over time. The use of tax credits is subject to the passive loss and alternative minimum tax provisions of the Internal Revenue Service.

Tax credits that are allocated to any project are claimed in equal amounts for a 10-year period. The rental property generating the credit must remain in compliance with the program guidelines and rent restriction requirements for a period of not less than 15 years from the first taxable year of the credit period.

The amount of tax credits available for allocation each year by NIFA is established pursuant to certain requirements of the Internal Revenue Code. Tax Credits are awarded for specific projects pursuant to NIFA's Low-Income Housing Tax Credit Program Allocation Plan. Tax Credits must be allocated by NIFA to a specific project in order for such credits to be claimed by the owner. The procedure followed by NIFA in awarding credits is described in the current Allocation Plan.


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How do applicants qualify for tax credits?

In order to be considered for tax credits in the State of Nebraska, the proposed property must entail new construction, substantial rehabilitation, or acquisition and substantial rehabilitation. The minimum requirements necessary to qualify any building for substantial rehabilitation credits under the tax credit program are found in Section 42(e)(3) of the Internal Revenue Code of 1986.

For a building to be substantially rehabilitated, the expenditures during any 24-month period must be at least the greater of: (a) 10 percent of the depreciable basis of the building determined as of the first day of the 24-month period; or (b) an average of $3,000 per low-income unit.

Qualified new construction and substantial rehabilitation costs earn credits at a rate of approximately 9% (4% if tax-exempt bonds or other federal subsidies are used) each year for a 10-year period.


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What is the application process?

In order for a project to be considered for tax credits, the owner must complete an application and submit it to NIFA. Application dates for 2002 are:

  • Cycle 1:
    • Application Cycle Opens: January 18
    • Deadline: January 25
    • Reservations Issued: February 22
    • Approximate amounts of tax credits reserved: $1,000,000
  • Cycle 2
    • Application Cycle Opens: March 22
    • Deadline: March 29
    • Reservations Issued: April 19
    • Approximate amounts of tax credits reserved: $500,000
  • Cycle 3
    • Application Cycle Opens: May 17
    • Deadline: May 24
    • Reservations Issued: June 21
    • Approximate amounts of tax credits reserved: balance of LIHTC
  • Cycle 4
    • (If necessary) - to be determined by NIFA

For complete information regarding the NIFA Low-Income Housing Tax Credit Allocation Plan, fill out a Feedback form or contact the NIFA office at (402) 434-3900 or 1-800-204-NIFA (6432). Click here to download application forms.

Low-income housing tax credits are a proven and acceptable tool for financing affordable rental units. NIFA would be delighted to work with you to see if tax credits are appropriate in your community.


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What are eligible projects?

To be considered an eligible project, a development must include a minimum percentage of units (20% or 40%) to be set aside for eligible low-income tenants. The rent charged on these set-aside units is restricted so that the gross rent, with respect to such units, does not exceed 30 percent of the imputed income of the proposed occupant of the unit. Code citings pertaining to rent restrictions can be found in Section 42(g)(2) in the Internal Revenue Code.

Pursuant to Section 42(g)(1) of the Code, a qualified low-income project means any project for residential rental occupancy if it meets the requirement of either:

  • 1. At least 20 percent or more of the residential units in the project are both rent restricted and occupied by individuals whose income is 50 percent or less of the area median gross income,* or
  • 2. At least 40 percent or more of the residential units in the project are both rent restricted and occupied by individuals whose income is 60 percent or less of the area median gross income.*

          * The median income tables are established and adjusted annually by the appropriate
             government entity.

Since tax credits are awarded on a competitive basis, NIFA's Allocation Plan encourages "targeting" of the units to income levels lower than the federal limits described above.

Tax credits may only be claimed on units that have been set aside for participation under the program. Because of the significant benefit of the tax credit, it is common for project owners to set aside 100 percent of the units for qualification under the tax credit program. In doing so, owners or investors can claim the maximum amount of tax credits eligible for the development.


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FAQ's

MOST COMMONLY ASKED QUESTIONS PERTAINING TO THE TAX CREDIT PROGRAM

The following represent a sampling of common questions asked of NIFA concerning the tax credit program. When possible, NIFA will provide specific Code citings as a supplement to the answers provided. NIFA will not provide any opinions concerning the Code and its relationship to any particular real estate transaction, such opinions should be sought from qualified third party sources.

Questions:

  1. How long does it take from the date of my application until I find out if I am to receive a commitment for tax credits?
  2. What happens if my application is denied by NIFA for tax credits during an application cycle?
  3. Do I need to hire a consultant for the purpose of applying for the tax credits?
  4. Do I need to hire either a certified public accountant (CPA) or a tax attorney in applying for the tax credits?
  5. When I am calculating the maximum rental rate of the tenants, and I am not paying for electricity (or some other utility) must I estimate the actual monthly utility expense to the tenant in determining the final eligible rental rate?
  6. What happens when I have leased a unit to a Section 8 recipient and the fair market rent paid through the Section 8 program exceeds the maximum rent requirements?
  7. I have completed the rehabilitation of a property in March of 1996 and I would like to be considered for tax credits. Some of the costs that are associated with this rehabilitation were incurred in 1995. May I apply for these tax credits in 1996 even though I have completed my rehabilitation prior to making an application with NIFA?
  8. When would the purchase of an existing apartment complex qualify for the acquisition tax credits?
  9. Can an application fee be charged for a prospective Section 42 tenant? If so, does the fee have to be returned after the tenant has been accepted, applied towards a security deposit, or applied towards rent? Or, can the owner keep the fee to cover out-of pocket costs, and if so, what convention is used to determine actual costs? What about applicants who are not accepted?
  10. Can a project have additional charges, such as appliance or furniture rent (assuming the costs exceed maximum allowable rent and that the items being rented are not included in eligible basis)? Can they be included on the lease as part of the total rent?
  11. In a situation where a resident in a qualified household gets married or adds a household member (remaining in the same unit), and this addition causes the income to exceed the published limits, would they remain qualified under the 140 Percent Rule or become an unqualified unit?
  12. If a single resident household initially qualifies for the unit, then a year later becomes a full-time student, is the household ineligible to continue tenancy? Is this unit out of compliance?
  13. Can the manager's unit float or does it have to be specially designed at application? Can the size of the designated non-revenue producing unit change without affecting allowable credits? Also, can an additional unit be assigned to a second manager for a larger project after allocation, if security or management problems arise which would be remedied by the addition of another manager/security personnel?
  14. If the financial arrangement with the manager includes the manager paying some rent on the unit, does this change the character of the unit? If other common space is producing income (for example, the lounge in a senior's project rented out for special occasions) would this affect their inclusion in eligible basis?

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Copyright 2000 Nebraska Investment Finance Authority. All Rights Reserved.