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Low Income Housing Tax Credit (LIHTC)

A Tax Incentive for Housing Investors

 

The Low Income Housing Tax Credit Program is an investment vehicle created by the federal Tax Reform Act of 1986, which is intended to increase and preserve affordable rental housing by replacing earlier tax incentives with a credit directly applicable against taxable income. Administered in Michigan by the Michigan State Housing Development Authority (MSHDA), this program permits investors in affordable rental housing who are awarded the credit- corporations, banking institutions, and individuals - to claim a credit against their tax liability annually for a period of 10 years.

 

A Community Reinvestment Opportunity

 

Corporate investors in this program are able to receive the tax credit and may also get additional tax benefits in the form of losses and depreciation. Furthermore, financial institutions may receive credit under the Community Reinvestment Act for their participation in tax credit developments, while corporate entities will be assisting in the creation of affordable housing in Michigan communities.

 

How the Tax Credit Program Works

 

The maximum tax credit a project may receive is based on a percentage of the portion of rental housing (whether the housing is newly constructed or rehabilitated) that the owner agrees to maintain as both rent and income restricted for a period of at least 18 years. At a minimum, either 20 percent of the units must be for residents whose incomes do not exceed 50 percent of area median income or 40 percent of the units must be for residents whose incomes do not exceed 60 percent of the area median income (as determined and adjusted annually by HUD). The rents on the units must also be restricted. An annual credit equal to roughly 9 percent of the qualified basis of construction or rehabilitation costs is available to developments not utilizing federal or tax-exempt financing. An annual credit roughly equal to 4 percent of the qualified basis is applicable where federal or tax-exempt financing is utilized and, in certain cases, for acquisition cost associated with rehabilitation.

 

The Tax Credit Allocation Process

 

Each state has an annual tax credit authority equal to $2.00 per state resident. Michigan's annual authority is approximately $20 million. The process used by MSHDA to evaluate applications and allocate credit is described in Michigan's Qualified Allocation Plan. Briefly, an application including detailed financial information and various supporting documentation, must be submitted to MSHDA for review and evaluation. The process involves three stages - reservation, commitment, and allocation of credit. The final determination of how much credit will actually be awarded is made at the allocation stage.

 

To Obtain More Information

 

To obtain more information on Michigan's Low Income Housing Tax Credit Program, or to discuss how the credit can be applied to a specific project, call the Low Income Housing Tax Credit Program at

 

(517) 373-6007

 

TTY#: 1-800-382-4568

 

 

The following example illustrates the value of the tax credit to a developer who constructs a 100-unit building at a total cost of $60,000 per unit with taxable financing and reserves all of the apartments for low income tenants:

 

 

Construction Expenses

 

 Development Costs                           $6,000,000

 

 Less Land                                         -$200,000

 

                                                        _________

 

 Eligible Basis                                   $5,800,000

 

 Percentage of Low Income Units        x 100%

 

                                                        _________

 

 Qualified Basis                                 $5,800,000

 

 Applicable Credit Percentage             x 9%

 

                                                        _________

 

 Annual Credit                                   $522,000

 

 Period of Credit                                 x 10 Years

 

                                                        _________

 

 Total Credit over 10 years                  $5,220,000

 

 

 

The following example illustrates the value of the tax credit to a housing sponsor who, using taxable financing, acquires a 15-unit building for $120,000, spends $200,000 on substantial rehabilitation, and subsequently rents six of the units to low income residents:

 

Rehabilitation/Acquisition Expenses

Acquisition Credit

 

Building and Land                              $120,000

 

Less Land                                         -$20,000

 

                                                        _________

 

Eligible Basis                                    $100,000

 

Percentage of Low Income Units         x 40%

 

                                                        _________

 

Qualified Basis                                  $40,000

 

Applicable Credit Percentage              x4% Annual

 

Acquisition Credit                              $1,600

 

                                                        _________

 

Rehabilitation Credit

 

Rehabilitation Costs                       $200,000

 

Percentage of Low Income Units      x 40%

 

                                                     _________

 

Qualified Basis                               $80,000

 

Applicable Credit Percentage          x 9%

 

                                                     _________

 

Annual Rehab Credit                      $7,200

 

Acquisition Credit                           $1,600

 

                                                     _________

 

Total Annual Credit                        $8,800

 

Period of Credit                              x 10 Years

 

                                                    _________

 

Total Credit over 10 years               $88,000





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