Low-Income Housing Tax Credit Projects: All About the Bases

The Low-Income Housing Tax Credit (LIHTC) program is a vital tool in the development of affordable housing across the United States. This program incentivizes private investment by offering tax credits to developers who build or rehabilitate low-income housing. One of the key concepts in the LIHTC program is the amount of “basis” in the project. Understanding what the different types of bases are and what costs are included in each type of basis is crucial for project accountants, developers, and investors, as it directly impacts the financial viability and compliance requirements of these projects.

This article will explain the key types of bases in a LIHTC project, exploring why understanding these bases are important and what types of costs are included in each basis. By providing a comprehensive overview, we aim to equip readers with the knowledge needed to navigate some of the complexities of LIHTC projects and ensure their successful execution.

Eligible Basis

Eligible basis represents the total costs that are eligible within the project for generating tax credits. These costs typically include the costs associated with acquiring, rehabilitating, or constructing a low-income housing property. The importance of the eligible basis is due to its direct impact on the amount of tax credits a project can generate. The eligible basis must comply with specific regulations set forth by the Internal Revenue Service (IRS) defined primarily by reference to IRC §42, §103, and §168. Properly determining the eligible basis ensures that the project remains in compliance with LIHTC regulations and remains financially feasible.

Eligible basis includes the costs associated with the depreciable residential rental project that are paid or incurred by the end of the first tax credit year. This notably excludes non-depreciable property (e.g., land acquisition costs) and/or costs included with non-residential components of the projects (e.g., commercial space). Costs attributable to common areas and corridors and functionally related facilities are also included in the eligible basis so long as they are for the use of tenants and reasonably required by the project. Further, the portion of the building costs associated with providing supporting services to assist tenants in transitional housing to retain permanent housing. In addition, community service facilities are includable in eligible basis so long as the services being offered are designed to serve those tenants whose income is 60% or less of the area median income. The amount of eligible basis included for the portion of the building providing supporting services and community service facilities are subject to certain other limitations and qualification criteria.

The following table identifies common costs included in the development of a low-income residential rental project and the general inclusion or exclusion of the item of costs in eligible basis.

Hard Costs: These are the direct construction costs for the physical construction of a new building or the acquisition and rehabilitation of an existing building.

Soft Costs: Soft costs are indirect expenses related to the development of a project. Unlike hard costs, which are directly tied to the physical construction of the building or acquisition and rehabilitation of an existing building, soft costs encompass a wide range of services and fees that are essential for the successful completion of the project.

Note: The table above is presented to provide a general overview of common costs and classification. The items of cost identified above are general in nature and certain costs may be subject to limitations or further judgement for inclusion/exclusion based upon the underlying nature of the cost and relation to the project.

Aggregate Basis

Aggregate basis is the total amount of building development and land costs associated with a qualified building. It will differ from eligible basis due to the inclusion of land and may include other additional items that are not capitalizable to the residential rental property component of the project. A couple of common items outside of land that may be included in aggregate basis but are excluded from eligible basis are off-site land improvement costs and costs associated with a commercial space in the building. Aggregate basis is a key input in the calculation of the “50% test” specified in IRC 42(h)(4)(B), applicable to 4% LIHTC projects. This test allows for the credit on 100% of the qualified low-income units so long as 50% or more of the aggregate basis of the project is financed through tax-exempt bonds. A project that does not meet the “50% test” could have a significant reduction of tax credits available for the project than what was originally forecasted.

Carryover-Allocation Basis and Reasonably Expected Basis

One key requirement in the LIHTC regulations is that property owners must expend 10% of the projects reasonably expected basis one year from the carryover agreements effective date. Under IRS Regulation §1.42-6 the carryover-allocation basis is the adjusted basis in land and depreciable property that is reasonably expected to be part of the project, which could include non-residential rental property (i.e. commercial space). For an item of cost to be included in carryover basis the cost must have been properly accrued for if an accrual method taxpayer within one year from the carryover agreements effective date. The reasonably expected basis is the total estimated land and depreciable property as of the close of the second calendar year following the calendar year of the allocation.

Conclusion

The costs that are included in the different types of bases can be subject to complex determination, changing regulations and case law. If you need help understanding and accounting for the costs included in your LIHTC project, please do not hesitate to reach out to a Clark Nuber accounting professional.

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