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Basics of IRS Code Section 42 Low-Income Housing Tax Credits. Introduction. What is NCHFA? Why am I here? What is the LIHTC?. § 105‑277.16. - PowerPoint PPT Presentation
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Basics of IRS Code Basics of IRS Code Section 42Section 42
Low-Income Housing Low-Income Housing Tax CreditsTax Credits
Basics of IRS Code Basics of IRS Code Section 42Section 42
Low-Income Housing Low-Income Housing Tax CreditsTax Credits
IntroductionWhat is NCHFA?
Why am I here?
What is the LIHTC?
§ 105‑277.16“[D]evelopment to which [NCHFA] allocated a federal tax credit under section 42 is designated a special class of property under… the NC Constitution and must be appraised, assessed, and taxed in accordance with this section.”
§ 105‑277.16“The assessor must use the income approach as the method of valuation for property classified under this section and must take rent restrictions that apply to the property into consideration in determining the income attributable to the property.”
§ 105‑277.16“The assessor may not consider income tax credits received under section 42 or under G.S. 105‑129.42 in determining the income attributable to the property.”
LIHTC housing isAlways rental
Many types of structures
Rehabilitation and new construction
2,000 units and 35 awards annually
Total of 50,000 units in 1,400 projects
Only awarded by NCHFA
IRS Code Section 42Owners must follow rules on
– Income,
– Rent, and
– Suitability
Contained in recorded use agreement
NCHFA monitors and reports violations to the IRS
IRS Code Section 42Rent limit is actually a maximum
housing expense
Generally is 60% area median income less utility allowance
Specifics are very complicated for both AMI and utilities
IRS Code Section 42Rules apply for 30 years
Are ways to exit, including foreclosure
NCHFA provides DoR with a list of Section 42 properties
Includes all, with indicator of which are added and removed
The List
Property Name City County Cycle Address Zip Units Removed AddedAuburn Spring Burlington Alamance 2005 2950 Crouse Lane 27215 48 Auburn Trace Apartments Burlington Alamance 2005 2944 Crouse Lane 27215 80 Graham Village Apts Graham Alamance 1993 920 E.Hanover Road 27253 50 Cannon Place Graham Alamance 1997 508 E.Parker Street 27253 74 Westhampton Apts Mebane Alamance 1989 1015 Mebane Airport Road 27302 40 Deerfield Crossing Apts Mebane Alamance 1996 600 Deerfield Trace 27302 118 Mebane Mill Lofts Mebane Alamance 2009 301 W Washington Street 27302 75 1Ridgeway Apts Taylorsville Alexander 1987 First Ave Dr Se 28681 32 The Oaks Taylorsville Alexander 1996 100 2nd Avenue 28681 40 Ridgeview Apts Sparta Alleghany 1988 218 E. Whitehead St 28675 36 Highland Village Sparta Alleghany 1999 29 Highland Village Circle 28675 30 Maplewood Apts Sparta Alleghany 2001 273 Independence Road 28675 30 Pine Ridge Place Polkton Anson 1993 401 Pine Ridge Place 28135 16 Wyndsor Downs Polkton Anson 2004 11 Wyndsor Court 28135 32 Pine Terrace Apts Wadesboro Anson 2001 100 Pine Bluff Street 28170 24 Laurel Commons Apts Wadesboro Anson 2001 Burns Street 28170 24 Oak Hill Wadesboro Anson 2004 1331 North Greene Street 28170 72
Common issuesNot all affordable projects qualify, some
are only in other programs
Changes, new and removed
How to value- NCHFA is not in a position to advise
Always welcome to ask questions 919.877.5645 [email protected]
How do LIHTCs make housing affordable?
YIKES!
Actually has a simple explanation:Funds invested for the tax credit
partially replace loan financing
But what does that mean?
Loans have to be repaid (usually)A 36 unit apartment complex costs
$3,380,000 to build
Borrow $3,080,000 from bank
(the rest from an investor)
Monthly payment of $24,228
That’s $673 per household every month!
If the project has Housing Credits…Whoever owns the building avoids
$2,592,000 in taxes over 10 years
Amount calculated on depreciable items (bulldozer test)
Determined up-front
What the rest of us get for this tax breakFor every dollar of the $2,592,000 a
large company makes an investment
Around $0.85 per $1 in tax reduction
Thus $0.15 better off; expects no other return
Now time for a little math…•“price” x tax credits = investment
•$0.85 x $2,592,000 = $2,203,200
Still a $3.38 million project
•cost – investment = loan amount
•$3.38M - $2.20M = $1.18M loan
Finally the conclusionMonthly payment on a $1,176,800
loan is $9,257, which = $257/unit
If built without tax credits monthly payment is $24,228, or $673/unit
Investment saves tenant households $416 each month
Summary of the numbers
MARKETCost $3,380,000Invest $300,000Loan $3,080,000Payment $24,228Units 36Per unit $673
TAX CREDIT$3,380,000$2,203,200$1,176,800
$9,25736
$257Savings $416