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Basics of IRS Code Section 42 Low-Income Housing Tax Credits

Basics of IRS Code Section 42 Low-Income Housing Tax Credits. Introduction. What is NCHFA? Why am I here? What is the LIHTC?. § 105‑277.16.

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Basics of IRS Code Section 42 Low-Income Housing Tax Credits

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  1. Basics of IRS Code Section 42Low-Income Housing Tax Credits

  2. Introduction What is NCHFA? Why am I here? What is the LIHTC?

  3. § 105‑277.16 “[D]evelopment to which [NCHFA] allocated a federal tax credit under section 42 is designated a special class of property under… the NC Constitution and must be appraised, assessed, and taxed in accordance with this section.”

  4. § 105‑277.16 “The assessor must use the income approach as the method of valuation for property classified under this section and must take rent restrictions that apply to the property into consideration in determining the income attributable to the property.”

  5. § 105‑277.16 “The assessor may not consider income tax credits received under section 42 or under G.S. 105‑129.42 in determining the income attributable to the property.”

  6. LIHTC housing is Always rental Many types of structures Rehabilitation and new construction 2,000 units and 35 awards annually Total of 50,000 units in 1,400 projects Only awarded by NCHFA

  7. IRS Code Section 42 Owners must follow rules on • Income, • Rent, and • Suitability Contained in recorded use agreement NCHFA monitors and reports violations to the IRS

  8. IRS Code Section 42 Rent limit is actually a maximum housing expense Generally is 60% area median income less utility allowance Specifics are very complicated for both AMI and utilities

  9. IRS Code Section 42 Rules apply for 30 years Are ways to exit, including foreclosure NCHFA provides DoR with a list of Section 42 properties Includes all, with indicator of which are added and removed

  10. The List

  11. Common issues Not all affordable projects qualify, some are only in other programs Changes, new and removed How to value- NCHFA is not in a position to advise Always welcome to ask questions 919.877.5645 mshelburne@nchfa.com

  12. How do LIHTCs make housing affordable? YIKES!

  13. Actually has a simple explanation: Funds invested for the tax credit partially replace loan financing But what does that mean?

  14. Loans have to be repaid (usually) A 36 unit apartment complex costs $3,380,000 to build Borrow $3,080,000 from bank (the rest from an investor) Monthly payment of $24,228 That’s $673 per household every month!

  15. If the project has Housing Credits… Whoever owns the building avoids $2,592,000 in taxes over 10 years Amount calculated on depreciable items (bulldozer test) Determined up-front

  16. What the rest of us get for this tax break For every dollar of the $2,592,000 a large company makes an investment Around $0.85 per $1 in tax reduction Thus $0.15 better off; expects no other return

  17. Now time for a little math… • “price” x tax credits = investment • $0.85 x $2,592,000 = $2,203,200 Still a $3.38 million project • cost – investment = loan amount • $3.38M - $2.20M = $1.18M loan

  18. Finally the conclusion Monthly payment on a $1,176,800 loan is $9,257, which = $257/unit If built without tax credits monthly payment is $24,228, or $673/unit Investment saves tenant households $416 each month

  19. MARKET Cost $3,380,000 Invest $300,000 Loan $3,080,000 Payment $24,228 Units 36 Per unit $673 TAX CREDIT $3,380,000 $2,203,200 $1,176,800 $9,257 36 $257 Savings $416 Summary of the numbers

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