Low-Income Housing Tax Credit Program
"QUESTIONS & ANSWERS"
What is the Low Income Housing Tax Credit Program?
The Low-Income Housing Tax Credit Program is a tool for private developers and non-profit entities to construct or rehabilitate affordable rental units. Federal and state tax credits may be used to obtain a dollar-for-dollar reduction in income tax liability for 10 years or to obtain equity for a project through syndication of the credits.
The program may be used with other state and federal programs to increase the feasibility of a rental project. Some of these other programs include a combination of rental subsidy under several Federal programs, low-cost interim construction loans available from the state, low-cost loans or grants from the Rental Housing Trust Fund, and a waiver of the 4% general excise tax.
Who is eligible to use the program?
Any individual, corporation, partnership, trust or other legal entity can utilize low-income housing tax credits if it has sufficient taxable income to be offset by the credits. Individuals may be limited in the amount of credit they are eligible to use (check with your tax accountant). Non-profit organizations who have an ownership interest in a low-income housing project or owners with minimal tax liability may also utilize the tax credit by raising equity for their project through the sale of the credits.
The program offers tax benefits of approximately $1.8 million each year, in addition to unused carryover credits from the previous year, to owners of low-income housing in Hawaii. 10% of this amount is reserved for non-profit organizations.
What are the requirements?
To qualify for a tax credit, owners must meet these general guidelines in addition to other program requirements (see Section 42 of the Internal Revenue Code for specific eligibility):
• The tax credit is available only for units rented to low-income occupants. This means that a project must have at least 20% of its units rented to households with incomes of 50% or less of area median income; or at least 40% of the units must be rented to households with incomes of 60% or less of area median income.
• Low-income rents, including utilities, are restricted based on the number of bedrooms in the unit and the area median income as established annually by HUD.
• The area median income varies in each county. Area median income limits are adjusted for family size. Contact the Hawaii Public Housing Authority (HPHA) for these figures.
• The project must comply with the above rental restrictions for at least 18 years. Owners must recertify the income of low-income occupants each year.
How much of a tax credit can I receive?
The tax credit program encourages owners to buy and rehabilitate or construct housing for low-income persons by providing a federal tax credit of up to 9% of the acquisition, construction or rehabilitation costs (does not include cost of land) of the project. This credit applies only to housing costs for low-income units and can be claimed each year for 10 years. In addition, a State Low-Income Housing Tax Credit offers a state tax credit equal to 30% of the federal credit.
To receive a 9% tax credit, the low-income units must be either newly constructed or substantially rehabilitated (at least $3,000 per unit or 10% of the building's adjusted basis). Owners constructing new units with tax-exempt financing receive a 4% tax credit.
How do I calculate the tax credit amount?
To determine the amount of tax credit available to a project, multiply the tax credit rate by the project's qualified basis. "Qualified basis" means any depreciable costs (therefore land would not be included) multiplied by the project's percentage of low-income units. This tax credit amount reduces the owner's federal and state income taxes for 10 years, assuming both the property and the owner remain eligible.
For example, an owner obtains conventional financing and builds a 50-unit project; 10 units are occupied by low-income renters. Total development costs are $6.0 million, land costs are $1.2 million.
Here's how to calculate the owner's 9% tax credit:
$6.0 M - $1.2 M = $4.8 million (eligible basis)
10 low-income units ¸ 50 total units = 20%.
$4.8 M x 20% = $960,000 (qualified basis).
$960,000 x 9% tax credit = $86,400 (annual federal tax credit which can be taken each year for 10 years)
$86,400 x 30% = $25,920 (annual state tax credit which can be taken each year for 10 years).
HPHA is required to underwrite the project and award only the amount of credits required to make the project feasible.
How do I apply for tax credits?
Contact HPHA at (808) 587-0567 for a low-income housing tax credit application package. HPHA provides staff assistance for the tax credit program and reviews developers' proposals. The Board of Directors for the HPHA approve tax credit allocations for the acquisition and rehabilitation or construction of low-income housing tax credit projects.
Outer islands may call HPHA toll free by dialing:
Kauai - 274-3134 and then 70597
Maui - 984-2400 and then 70597
Hawaii - 974-4000 and then 70597
Molokai/Lanai - 1-800-468-4644 then 7059
Hawaii Low Income Housing Tax Credit Compliance Manual
Table of Contents
1. Introduction to Manual
2. Compliance Issues
3. Determining Tenant Eligibility
4. Recordkeeping
5. Noncompliance
6. Forms
7. Compliance Monitoring
8. General Explanation of the Tax Reform Act of 1986 - Blue Book
9. IRC Section 42
10. IRS Form 8609 With Instructions
11. IRS Final Regulations - Compliance Monitoring
12. IRS Revenue Ruling 90-89 (Minimum Set-Aside Requirements)
13. IRS Revenue Ruling 92-61 (Treatment of Resident Manager's Unit)
14. IRS Revenue Ruling 94-57 (Changes in Medium Gross Income)
15. IRS Revenue Procedures 94-57 (Gross Rent Floor)
16. IRS Revenue Procedure 94-64 (Waiver of Annual Income Recertification)
17. IRS Revenue Procedures 94-65 (Documentation of Income from Assets)
18. IRS Notice 88-80 (Income Determination)
19. IRS Advance Notice 88-116 (Placement in Service)
20. IRS For 8586; IRS Form 8611; IRS Form 8823
21. IRS 26 CFR Part 1 (Available Unit Rule)
22. HUD 4350.3 REV-1 Appendix 3: Acceptable Forms of Verification
23. HUD 4350.3 REV-1 Chapter 5: Determining Income and Calculating Rent
24. HUD 4350.3 REV-1 Appendix 15: Verification and Consent Guidance and Sample Formats
25. IRS Memo 200137028 Clarification of Reasonable Attempts
26. IRS Section 42-5 Regulations