The issue of housing affordability and cost-burdened renters is a persistent problem that cannot be ignored. According to the Joint Center for Housing Studies at Harvard University, rental affordability has continued to decline as more households are forced to spend a larger portion of their income on rent.
One solution that has proven effective is increasing the supply of affordable housing. A recent article in the Novogradac Journal of Tax Credits highlighted how the federal low-income housing tax credit (LIHTC) has been successful in providing much-needed affordable rental homes.
However, it’s not just up to the federal government; states are also taking action by creating their own tax incentives for affordable housing development. So far, over 25 states have implemented models alongside LIHTC.
For state governments looking to participate in these programs, there are some best practices they should consider. These include keeping tax incentives simple and building upon existing federal programs like LIHTC. It’s also important for states to take steps towards increasing investor interest in these programs.
One suggestion made by the article was allowing bifurcation of state tax credits from federal credits so investors can claim them before receiving approval from Form 8609 or its equivalent.
There are other considerations that need attention when implementing new state-based affordable housing credits:
– Allocation vs Certification: Allocated credits come from equity contributions while certified ones can be purchased directly from projects or participants. While allocated credits offer long-term benefits for investors with potential tax advantages, they also come with compliance obligations and slower impact on state revenues compared to certified ones.
– Impact on Pricing: Investors price these types of investments based on returns or yields which means longer credit periods don’t necessarily translate into higher yields due time value effects.
On one hand shorter credit periods may yield higher equity pricing but this would lead less efficient use taxpayer money funding program costs spread out over longer term
While shorter period may yield high prices faster redemption will cost more than spreading costs out over longer term.
In order to optimize outcomes and avoid pitfalls, it’s important for states to carefully plan and involve experienced tax professionals in the process of implementing these programs. By following best practices, states can effectively use tax credits to increase affordable housing options for their residents.
