A tax credit apartment is an apartment complex owned by a landlord or developer who participates in the federal low-income housing tax credit (LIHTC) program.
The person or company that owns a tax credit apartment can claim a tax credit for that unit or building in return for renting it out to low-income tenants at a restricted rent.
Let’s learn more about tax credit apartments!
How Does a Tax Credit Apartment Work?
Tax credit apartments work on the principle of LIHTC, which is designed to ensure that low-income tenants have to pay rent they can afford to pay.
The government pays tax credits to apartment owners who acquire, build, and rehabilitate affordable rental units.
The LIHTC is a federal program that was legislated as part of the 1986 Tax Reform Act.
The Tax Policy Center report says that an estimated 110,000 affordable rental units have been built under the LIHTC every year since the mid-19990s, taking the total number of units to more than 2 million.
How Does the LIHTC System Work?
This housing program is administered by the IRS in collaboration with state housing finance agencies throughout the United States of America.
It stands out from other housing programs as those are typically issued by the U.S Department of Housing and Urban Development (HUD
The tax credit system is multi-faceted. First, the federal government issues tax credits to the state governments, who then award the credits to private developers of tax credit apartments.
Usually, developers sell these credits to private investors in return for their investments. The developers or investors can claim these credits once the apartments are rented over a 10-year period.
The owners of low-income housing units take the tax credit from the government and the rent paid by the low-income tenant.
These units are either managed by the landlord or through housing societies.
The rent is typically based on the size of the occupant’s family. Some landlords base the rent on whether the tenant gets a federal benefit to pay their monthly rent payment or not.
How Do Property Owners Qualify for LIHTC
For an apartment building to qualify for LIHTC, the owner must meet the following criteria:
- At least 20% of the units in the apartment complex must be occupied by tenants with an income less than or 50% of the AMI/area’s median income after adjusting it for family size.
- At least 40% of the units are rented out to tenants who have an income of 60% or less of the AMI.
- Tenants must occupy at least 40% of the complex units with an average income of 60% of the AMI, and no unit should be occupied by a tenant with an income greater than 80% of AMI.
The gross rent should not exceed 30% of either 505 or 60% of the area’s median income, depending on the share of tax credit apartment units in the complex.
All low-income housing tax credit units need to comply with at least one of the rent and income tests for 15 years. Otherwise, the government will recall the credits.
If they do not comply with the tests, they will have to face an additional compliance period of 30 years.
However, since they only have to comply for the first 15 years, people complain that these properties stop being available to low-income families after the 15-year period ends.
Do Landlords of LIHTC Apartments Verify Your Income?
The only way for you to live in a tax credit apartment and pay minimal rent is to become income-eligible. It will ensure that your rent is below the market average.
Before you qualify for a tax credit apartment unit, your property manager or landlord will verify your income and assets. Therefore, before applying for such an apartment, keep your credentials in order.
Not everyone can live in a low-income housing tax credit unit. It requires extensive income and background checks.
Landlords perform these checks to prevent people with average or good income from renting low-income tax credit apartments.
It ensures these units remain unoccupied for tenants who deserve them.
How Does a Landlord Calculate the Rent of a Tax Credit Apartment?
The rent tenants have to pay to live in a tax credit apartment is typically based on the number and size of the rooms in the apartment.
At times, it can be affected by the number of people in the tenant’s family.
The landlord will usually calculate the rent based on the assumption that each bedroom will accommodate 1.5 people or one occupant in case you apply for a studio apartment.
By this logic, the rent of a two-bedroom apartment will be based on three to four occupants.
Typically, a utility allowance is also included in the rent of a tax credit apartment.
Will the Number of People in your Family Affect Your Eligibility for a LIHTC Apartment?
The total income in your household needs to be less than the area median gross income. This is based on the size of your household.
So, it will affect your eligibility for a low-income apartment.
But it will only do so if you have more family members that earn, exceeding your income from the AMGI.
Does the Tenant of a Tax Credit Apartment Need to Sign a Different Lease?
When you are applying for a tax credit apartment, you do not need to sign a different or special lease. The program does not require landlords to give their tenants a specific lease.
However, you might discover that your lease contains an addendum with clauses that are specific to the low-income housing tax credit program.
For instance, your lease may state that you are to cooperate with your property owner, who will need to assess and verify your income status every year that you occupy the apartment.
It might also include a clause highlighting that if your landlord finds out you knowingly falsified information about your income when applying for the LIHTC apartment, they can terminate your lease.
Similarly, if you knowingly hid information about your assets, your landlord will have the power to end your lease, no questions asked.
What Makes You Ineligible for Applying for a Tax Credit Apartment?
Here are some factors that might make you ineligible for a low-income housing tax credit unit:
- A bad credit report might have you ineligible because your landlord might find you unreliable
- A poor rental history with your former landlords may find you subject to a rejection from a prospective landlord.
- If you have a criminal record, it might make it challenging for you to receive housing. However, it does not disqualify you.
- A history of violence and drug and alcohol abuse will also make it difficult for you to find a tax credit apartment.
Benefits of a Tax Credit Apartment
The obvious benefit of a tax credit apartment complex is that it provides families with low income the opportunity to rent apartments at low rents.
Since most of these units are in low-income communities, it enables families with low income to live in quality housing.
The benefit of having a roof over their head that doesn’t cost them their entire salary helps them focus on improving other aspects of their lives.
Possible Disadvantages of Tax Credit Apartments
Some possible disadvantages of low-income tax credit apartments include the high federal subsidy per unit that compensates too many players, including managers, investors, organizers, and more.
Additionally, LIHTC projects are often concentrated in low-income communities, where the tenants have limited economic opportunities, better schools, well-paying jobs, etc.
It further fuels the divide between the rich and the poor.
Moreover, once landlords are past the compliance period, they tend to keep fewer and fewer LIHTC units to earn more from their property.
Some people also argue that the regulations and statutes are needlessly complex, discouraging builders from getting into LIHTC projects.
The Bottom Line
The truth is that low-income tax credit apartments are a blessing for low-income households.
These houses enable them to find well-made units to live in that are within their means.
These units prevent low-income households from spending all of their money on housing, enabling them to focus on fulfilling their other needs and building their future.
Moreover, it gives landlords the opportunity to support low-income neighborhoods. It also gives them the benefit of a tax credit to make up for the low-income rent.
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