9% vs. 4% Low-Income Housing Tax Credits – What’s the Difference?
There are two types of low-income housing tax credits (LIHTC) that can be used to help finance the development of affordable housing. There are 9% credits and there are 4% credits. These are the rates that the entity’s qualified basis is multiplied by to determine the amount of LIHTCs for which the entity could receive on an annual basis. We are frequently asked what the difference is between the two types of credits.
9% LIHTC Credits
The 9% credit is what we see most often. This credit is used for new construction or rehabilitation expenditures. The 9% credit generates more equity than the 4% credit which puts the 9% credit in higher demand. Due to this demand, and the fact that the federal government only authorizes a limited amount of credits to each state every year, the 9% credit is a “competitive” credit meaning that the Pennsylvania Housing Finance Agency (or the tax credit allocating agency in any state) holds a funding round, generally on an annual basis, for developers and owners to submit applications in an effort to secure an allocation of credits. The winning applications will be allocated LIHTCs.
4% LIHTC Credits
A developer can obtain the 4% credit in two ways. If the development’s acquisition costs qualify for LIHTC, the development can “compete” for 4% credits to use for building purchase and related eligible acquisition costs. These credits can be used in addition to the 9% credits described above and the request for them is included in the application submitted during the competitive funding round.
The second way the 4% credit can be used is in deals financed with federal subsidies which are most often tax-exempt bonds. If a development is being financed using a federal subsidy, the 4% credit is used for all eligible costs which include rehabilitation or new construction expenditures as well as building purchase and related acquisition costs. If tax-exempt financing is used and certain criteria are met, this type of 4% credit is not competitive as described above, however the development must still meet certain state requirements to receive the credits.
Both the 9% and 4% credits are subject to the same affordability requirements.
McKonly & Asbury, LLP is a leader in accounting for affordable housing partnerships. Our team has the specialized knowledge to help you ensure you comply with IRS and tax credit allocating agency reporting requirements. For more information on these services and more be sure to visit our Affordable Housing page, and don’t hesitate to contact us.
About the Author
Elizabeth is a Partner with McKonly & Asbury as well as the Director of our firm’s Affordable Housing Services. She has over twenty years of extensive audit, tax, and consulting experience in the affordable housing industry. Elizabe… Read more
