Can a Landlord Get a Tax Credit for Renting to a Tenant at Poverty Level?

The Low-Income Housing Tax Credit is available to encourage building developers and owners to dedicate spaces in rental properties for renters with below-average income. The program provides a tax credit as long as landlords and owners meet stringent ownership and building requirements. A tax credit directly reduces tax liability as opposed to a deduction which only reduces income.

Low-Income Housing Tax Credit

The IRS runs the Low-Income Housing Tax Credit (LIHTC) program for all states across the country. The U.S. Department of Housing and Urban Development (HUD) also sponsors the program and manages its requirements. At its core, the program provides a tax credit for developers and building owners for choosing to rent at or below HUD's median income levels. This tax credit allows developers to receive lower cost loans for building rental properties and allows project investors a dollar-for-dollar tax credit based on the amount of money lent to low-income housing projects. These tax credits last up to 10 years as long as developers and investors continue to meet program requirements.

Occupancy Threshold Requirements

A building developer wishing to claim the credit may do so with one of two occupancy threshold requirements. The developer must restrict 20 percent of rental units to tenants with income not higher than 50 percent of HUD's median income level for the given area. The developer may alternately devote 40 percent of rental units to renters with income not higher than 60 percent of HUD's median income for the area surrounding the rental property. HUD adjusts median income levels by household size.

Rent Limits

Building owners and landlords determine rent for LIHTC units based on a percentage of area median income levels. The formula used by HUD involves taking percentages of renter income levels and subtracting it by the area median income levels to arrive at the maximum amount renters can afford each year in rental payments. Monthly rent must include a utility allowance and cannot exceed local market limits. HUD adjusts median income levels annually which in turn requires landlords and building owners to adjust rental payments to maintain tax credit eligibility.

Affordability Periods

HUD requires a minimum 30-year affordability period for LIHTC rental properties. This combines a 15-year compliance period with a 15-year extended use period. Some states may require a longer compliance period to maintain eligibility. Additionally, any building owner or property developer purchasing an existing rental property may turn the property into an LIHTC property only if the building did not change hands during the previous 10 years. The building must also have a history as a rental property during that 10-year period to be eligible as an LIHTC property.

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