Affordable Housing Tax Credit: A Vital Tool for Addressing the Housing Crisis

Affordable housing tax credit always remains a significant tool in combating the current problem of affordable housing.

Given their private finance mobilization feature, the potential of these tax credits is that they can encourage the private sector to develop more affordable units of rental housing for low-income households.

This blog post will discuss affordable housing tax credit, the categories, advantages and disadvantages of the tax credits for affordable housing.

Understanding Affordable Housing Tax Credit

The AHITC are federal business incentives offered to private enterprise to assist in the production of below-market rate housing for occupants earning low or moderate income.

They lower the overall tax of developers who can thereby source funds to undertake affordable housing projects free of financial pressure.

The biggest program in the United States is the Low- Income Housing Tax Credit (LIHTC) program created in 1986.

The LIHTC program provides federal tax credits to owners and developers of sufficient quality affordable rental housing projects by bearing the costs of construction or rehabilitation.

As a condition for getting the credits, developers are required to agree that a certain percentage of the dwelling units in the building will be rented out at affordable rates to the low-income earning populace for a very long time that is between 15 and 30years.

There are two main types of tax credits under the LIHTC program:

9% Tax Credits: These are more competitive, and provide higher subsidies, of up to 70% of total cost of construction of a project. They are mainly applied to new constructions only.

4% Tax Credits: These offer inferior subsidies which amount to approximately 30% of the project expenses. They are mostly taken in the rehabilitation of existing structures, or for the financing of other projects that put into use the tax-exempt bonds.

Benefits of Affordable Housing Tax Credits

Affordable housing tax credits create a lot of value that is not limited to offering homes to families with low wages only.

Here are some key advantages:

Increasing the Supply of Affordable Housing:

Still, one of the biggest advantages of affordable housing tax credits is that they promote the development of new or refurbishment of existing affordable rental housing.

So implemented it could make these projects significantly more financially appealing to developers, increase the overall stock of housing affordable to low the moderate income households sharply, and partly alleviate the shortage of affordable homes in many parts of the country.

Revitalizing Communities:

A key area that affordable housing projects can bring change is the physical regeneration of communities where there is substandard or unused land and buildings.

This can create activity at a local level by boosting property prices, creating employment prospects in property development as well as creating trading opportunities for businesses in the locality.

The availability of affordable housing is also good of neighborhoods since it ensures that people stay in the area because of high cost of rents.

Promoting Economic and Social Mobility:

Housing affordability is associated with positive social and economic development implications on occupants.

That is why, when families do not have to spend too large part of their income to pay rent, they are able to spend much more money on other things, on the needs which are also essential, on healthcare, education and savings.

This financial stability should help to reverse the poverty trap and improve social mobility.

Furthermore, families with physical assets in safe, affordable homes give their children a good chance of achieving better results for school and receive better treatments for sickness.

Challenges and Potential Solutions for Affordable Housing Tax Credit

In tackling the calamity of housing shortage, there is still some barriers that hinder its efficiency.

These challenges have to be taken into account and solve in order to get the further improvement of the potential of given tax credits for providing the necessary volume of affordable housing.

Challenges

Complexity and Competition for Credits:

The competition for affordable housing tax credit and especially the 9% LIHTC is very stiff.

The applicants themselves face and have to go through a rather elaborate application procedure and all the requirements imply a certain impediment to the part of the small developers or non-profit organizations.

At times, the demand for credits outstrips the supply greatly, meaning that projects grabbing the credits may take time to be funded and eventually completed.

Rising Development Costs:

In light of tax credits, other costs such as the price of land, construction materials, and labor make the development of affordable housing a costly affair.

In the higher cost cities, the tax credit subsidies may not be adequate for the variation between development costs and the actual rent affordable by the low income residents.

Long-Term Affordability Requirements:

For the purpose of maintaining the concept of affordable housing at par with the low income earners, the tax credit programs normally prescribe the length of time that the affordability should be maintained by the developers.

However, this is advantageous to the tenants, it may become a challenge to the developers in as much as they may lack capital to maintain the properties in the long run because rental income may not suffice to cater for fixed operating expenses.

Potential Solutions

Streamlining the Application Process:

Overcoming some of the challenges that are currently associated with the acquisition of tax credits can help small developers and non-profit organizations to engage in affordable housing.

Removing some paperwork obstacles and offering support to applicants could attract more different development companies to participate in affordable housing.

Increasing the Availability of Tax Credits:

Another possible action is to increase the volumes of LIHTCs to reach the high demand in affordable housing tax credit.

Thus, governments should expand the availability of credits to be able to sponsor more projects and avoid the competitiveness that at present restrains the program.

Also, modification of affordable housing tax credits enough to be relevant to development costs in different geographical areas can help the construction of affordable housing units in pricey areas.

Strengthening Long-Term Affordability Protections:

To keep the prices low, the government could offer other extra bonuses for the developers who are willing to offer extra years of affordability beyond the baseline.

This could include extending higher tax credit or giving subsidies for recurrent cost of maintenance and functioning.

Conclusion

Affordable housing tax credits are a potent weapon in the war against the shortage of affordable homes for people of low income for they have acted as effective catalysts that compel private sector developers to make investment in low-cost housing.

Such tax credits as well create more affordable rental housing stock but also contribute to positive impacts in the social, economic and the overall physical fabric of communities.

However, achieving these benefits it is necessary to solve some problems including: high degree of application, growing costs of development, and regional differences in credits provision.

Also read: Affordable Housing Tax Credit Program Compliance Manual