Federal Reserve Bank of San Francisco

Community Development

Community Investments Vol 21, Issue 3
Strengthening the Low Income Housing Tax Credit Investment Market

Author(s):

Winter 2009

Community Investments

The Low Income Housing Tax Credit (LIHTC) has been the federal government’s most successful program for producing quality rental housing for low-income families and individuals. It has created jobs, revitalized low-income communities, and expanded low-income families’ and individuals’ access to geographic areas that offer relatively good employment and educational opportunities. Affordable housing developers receive an allocation of housing tax credits through a competitive process, which they then sell to investors to raise equity for the project. Investors that purchase tax credits are able to reduce their federal tax liability dollar-for-dollar, so the purchase of $1,000 worth of tax credits reduces federal income tax liability by $1,000 (credits are typically sold at a discount, allowing investors to profit from the transaction). As a result of the equity made available through the sale of tax credits, the developer can complete the project with less debt and pass the cost savings on to the tenant in the form of lower rent.

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