As part of the Tax Reform Act of 1986, the United States Congress created the Low-Income Housing Tax Credit (LIHTC) Program to promote the development of affordable rental housing for low-income individuals and families. To date, it has been the most successful rental housing production program in the nation, creating thousands of residences with very affordable rents.

The housing tax credit, rather than a direct subsidy, encourages investment of private capital in the development of rental housing by providing credits to offset an investor's federal income tax liability. 

Affordable Rents

In exchange for the financing provided through the credit, owners agree to keep rents affordable over a 30-year period for families with incomes at or below 60 percent of the local median income.

Debt Reduction

Financial institutions, such as banks, insurance companies and government-sponsored enterprises make equity investments in exchange for receiving the tax credits. Equity from the sale of tax credits reduces the amount of debt financing that the property owner incurs. This process reduces the property’s monthly debt service, lowers the operating costs, and makes it economically feasible to operate the property at below-market rents.

KHRC's Role

KHRC administers the LIHTC program on behalf of the State of Kansas. The Corporation allocates credits based upon selection criteria and application ranking procedures set forth in KHRC's housing allocation plan. In addition, KHRC monitors tax credit properties during the compliance period to ensure that rents and residents’ incomes do not exceed program limits, and that properties are well-maintained. KHRC has authority to allocate approximately $60 million of ten year credits each year.

Owners of tax credit properties are eligible to take the federal tax credit each year for 10 years, provided the property continues to operate in compliance with federal guidelines. Excluding land, the annual amount of the tax credit is approximately 9% of the qualified cost of building or rehabilitating the property.

Credit Value

The property owner typically sells the tax credits to a corporation or group of investors. Currently the average rate per credit is 86 cents on the dollar. The proceeds provide equity in the development, which reduces the amount of debt required to build the property, and therefore reduces the monthly debt service and the amount of rent income that is required.

Eligibility

Tax credit rents must be affordable to households earning 80 percent or less of the local median income. Residents are responsible for their own rent payments, unless rent subsidies are available from other sources.  KHRC is required by the Internal Revenue Service to monitor tax credit properties for the compliance period to ensure that rents and resident’s incomes do not exceed federal limits and that the properties are well maintained.

Owners of properties receiving tax credit allocations must follow IRS rules and regulations that oversee the program. Owners are required to provide certain reports to KHRC and maintain certain records for the agency’s review. The tax credit program operates under a Qualified Allocation Plan (QAP) which is amended annually.

KHRC evaluates housing tax credit applications based on several characteristics, such as:

• Site/Location
• Development Design
• Development Team
• Targeting/Extended Use
• Financial Characteristics

Federal Regulations

Federal regulations require KHRC to allocate tax credits giving preference to proposals that:

• Serve the lowest income tenants
• Serve qualified tenants for the longest periods
• Contribute to a concerted Community Revitalization Plan
• Are intended for eventual tenant ownership