The federal low-income housing tax credit program has been successful since 1987 in providing low-income tenants with decent apartments at an affordable rent. If you're looking for an apartment at a tax credit property, there are certain things you should know before you apply. These are answers to commonly asked questions about the federal low-income housing tax credit program.
Q: What's the tax credit program?
A: The tax credit program, also known as the "federal low-income housing tax credit program" or simply LIHTC, is a popular, affordable housing program that has been around since 1987. Unlike most housing programs that are administered by the U.S Department of Housing and Urban Development (HUD), the tax credit program is administered by the IRS in coordination with state housing finance agencies across the country. Landlords who participate in the program get to claim tax credits for 10 years for their tax credit properties in return for renting at least some of their apartments to low-income tenants at a restricted rent.
Q: Do I get to claim a tax credit?
A: No. The tax credit program gets its name because owners of participating properties receive valuable tax credits in return for keeping their buildings affordable. As a tenant in a tax credit property, the benefit you receive comes in the form of restricted rent, assuming you're income-eligible.
Q: As part of household income, are annuities counted?
A: If you have a retirement or other annuity, there's a good chance it will need to be counted in some way as part of your household income. How a landlord should determine how to treat an annuity that you have (or that you may set up after you sign a lease for a low-income apartment at a tax credit property) depends on whether you have the right to withdraw the balance of the annuity and if you are already receiving payments.
If you've already begun getting payments, the landlord will need to ask your broker whether you have the right to withdraw the balance of the annuity. If you do have this right, then the landlord must treat your annuity as an asset.
Also, once you've begun receiving annuity payments, you normally can't convert it to a lump sum of cash. If that's your situation, then your regular payments will be treated as income by your landlord.
Expect that your landlord will need to verify whether you have the right to withdraw the balance (even if penalties are assessed), what the basis is on which the annuity may be expected to grow in the upcoming year, any surrender or early withdrawal penalty fee, and the tax rate and tax penalty that would apply if you were to withdraw the entire balance of your annuity.
Q: Are trusts counted as part of household income?
A: Trusts are often counted in some way as part of household income. How a landlord should determine how to treat a trust that you have (or that you may set up after you sign a lease for a low-income apartment at a tax credit property) depends on whether you have access to the principal in the account or the income from the account.
Q: Are assets counted as income?
A: No. Assets themselves aren't counted as income. However, any income that an asset produces is customarily counted when determining the income-eligibility of a household.
Q: Do landlords verify income?
A: Yes. If you're considering applying for a low-income apartment at a tax credit property, expect that the landlord or property manager will need verification of income and assets. The tax credit program requires an explicit confirmation, given how much is at stake.
Q: How exactly is my rent calculated?
A: The rent is calculated based on the number of bedrooms in the apartment, and not the actual number of people who live there. Your landlord must calculate your rent assuming that 1.5 occupants live in each bedroom (or one occupant, in the case of a studio).
So, the rent for a two-bedroom apartment, for example, would be based on three occupants (1.5 x 2 bedrooms) in the apartment.
The tax credit rent also includes a utility allowance.
The maximum rent you can be required to pay for a low-income unit in a tax credit property is 30 percent of a percentage (usually 50 or 60 percent) of area median gross income (AMGI).
Q: Does the number of people in my household affect eligibility?
A: Yes. The number of people in your household affects whether you can qualify for a low-income unit at a tax credit property. Your household must earn less than a certain percentage of AMGI, which is based on household size. On the other hand, the tax credit rent is not based on the actual number of people in your apartment.
Q: Will I need to sign a special lease?
A: No. The tax credit program doesn't require landlords to have tenants sign a special lease. But you may find a lease addendum with one or two clauses specific to the tax credit program. For example, you can probably expect a clause requiring you to cooperate with your landlord in recertifying and verifying your income each year, and there may be language saying that if your landlord learns that you knowingly gave false or incomplete income information when determining eligibility, this could be grounds for terminating your lease.
Q: Can I rent on a month-to-month basis?
A: When you first sign the lease for an apartment at a tax credit property, it must be for a term of at least six months (although there are a couple of exceptions). After that, you and your landlord can agree to renew your lease on a month-to-month basis.
Q: Will there be market-rate tenants in the building?
A: There may be. Many tax credit properties include some low-income apartments and some market-rate apartments.
Q: Will I stand out as low-income if there are market-rate tenants?
A: You shouldn't. Landlords are required not to segregate market-rate and low-income apartments, and no one at your tax credit property should know how much rent you pay unless you tell them.
Q: Is my income determined based on what I've made in the past year?
A: No. It's determined by looking forward and "annualizing" your income for the next year. For example, if you earn $3,000 a month at a job, this income will be counted as $36,000 (12 months x $3,000), even if it turns out you get a raise or even lose your job a month after moving into your apartment.
Q: How do landlords count irregular employment income?
A: Employment income must be included as part of household income, whether the income is steady or irregular.
Normally, landlords who participate in the tax credit program must use a tenant's current circumstances to "annualize" the income, which means include an amount that the tenant expects to earn over the next 12 months, even if it turns out that number is much higher or lower.
Q: Will a divorce settlement or joint assets disqualify me?
A: No. A prospective tenant isn't disqualified simply for having a divorce settlement or joint assets.
While it's possible that your income situation following divorce would make you ineligible, having a divorce settlement or joint assets aren't valid reasons to refuse to process a tax credit applicant's application or automatically consider the applicant not to be income-eligible.
Q: Is the rent based on my income?
A: No. Unlike other housing programs, tax credit rent is based on the average income in your county or other local areas. This average is known as the AMGI, which HUD updates each year. Your actual income matters when it comes to determining if you qualify for a low-income apartment at a tax credit property. But the actual rent you pay is not based on your income.
Q: Am I ineligible for others if I earn too much income for a tax credit property?
A: Not necessarily. Although every tax credit property must follow the same rules to determine income eligibility, you may earn too much for one tax credit property but still be considered eligible for others. This can happen if, for example, you earn 55 percent of the income limit. A property that must rent to tenants earning no more than 50 percent of the income limits would reject you, but properties using the 60 percent figure would find you eligible. Also, income limits vary by county, so if you earn slightly too much income for one property, you may have success at another property that uses different limits.
Q: Can I get evicted if my income goes way up after I move in?
A: You shouldn't have to worry about getting evicted for going over income. If your income rises to as high as 140 percent of AMGI, there's no problem. If your income rises above that level, it may require the landlord to take steps to make sure the building stays qualified for all its tax credits.
In the worst case, your landlord may (with proper notice) switch your apartment to market-rate, and you would lose the benefit of your restricted rent. However, if your income is that high, you're not low income and you should be able to afford the market-rate rent. Landlords at tax credit properties can only evict tenants for "good cause" as defined by state or local laws. This also means your landlord can't decide to not renew your lease without good cause.
Q: Each time my income changes, do I need to get recertified?
A: Fortunately, no. The tax credit program doesn't have "interim recertifications," which means if you switch jobs, get a raise, or buy or sell an asset, you don't need to get your income calculated and verified again. You should expect to meet with management to recertify your income just once a year, usually around the anniversary of your lease signing.
Q: As a student, can I live at a tax credit property?
A: The general rule is that if everyone in your household is a full-time student, then you can't rent at a tax credit property. So if you're a full-time student with a roommate who goes to school part-time, then you're fine. If everyone in your household goes to school on a full-time basis, ask management whether you fall into an exception.
Q: Must tax credit properties comply with discrimination laws?
A: Yes. Tax credit properties are subject to the same fair housing laws as conventional properties. Plus, thanks to an agreement between HUD, the Treasury Department, and the Justice Department (DOJ), the IRS can easily learn about a landlord's fair housing violation and use it as grounds for tax credit noncompliance. This means landlords at tax credit properties have even more reason not to discriminate against you.
Q: How can tenants and prospects get more information about program requirements?
A: Tenants and prospects often have questions about the income and rules for tax credit properties. In addition to the answers to frequently asked questions answered here, you can get state-specific questions answered by the state housing finance agency that administers the tax credit program where you live.