Low Income Housing Tax Shelter

Legal Tax Angles:

How to Save Taxes Without Going to Jail


Did you know the government will pay you back as much as 90% of the cost of building or renovating residential property that is rented to tenants whose income is below the average for the area where they live? We’re not talking about poor people who often cause severe damage to the government subsidized housing where they live. We are talking about retired people and students whose income is below the average in their community. We might be talking about a divorced mother with two or three children who is getting alimony and child support in addition to the wages from a job in a retail store. We could be talking about someone who lives in an affluent suburb but whose income is below the average in that area - even if it might be above average on a national scale.

Despite the fact that “low income housing” is not actually housing for the poor, the government has had a hard time getting investors to get past the mental stigma of section eight housing and visions of slums in the inner city. In order to induce more people to put money into this kind of housing, they have increased the “ante” to make it more attractive. Now, the tax benefits are so great, it’s almost as if you are given a choice of sending a check for up to $10,000 a year to the IRS or investing it in low income housing. If you send the check to the IRS you know you won’t ever see it again. If you spend it on renovating some low income housing, there’s a good chance you will get some future benefit from the money.

In order to participate in this  tax arrangement, you don’t even have to be directly involved with the renovation, renting or management of the property. You can invest through a real estate syndicator that specializes in this type of investment. Here are a few of the basic rules for low income housing investments.

Investors are entitled to a credit of 9% of the cost of renovating or building qualified low income housing units for ten years. Thus, over a ten year period, the investor gets back 90% of the renovation or construction costs. If the property is financed with tax exempt or subsidized loans, the credit is reduced from 9% per year to 4% per year. However, the subsidized loans are often as valuable or more valuable than the larger tax credit. 

The maximum credit each year is limited to a deduction equal to $25,000 times the taxpayer’s marginal tax bracket. For example, a taxpayer in the 28% federal tax bracket would be able to get a credit of up to $7,000 a year. A taxpayer in the 38.6% federal tax bracket would be able to get a credit equal to $9,650 per year. The credit is not allowed for the alternative minimum tax, so this type of investment is not recommended for those who are subject to the alternative minimum tax. The property has to be held for 15 years or some of the tax benefits must be repaid. 

Vern Jacobs

Copyright, 2003

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Caution:  While the information in this web site is believed to be from reliable sources and is believed to be accurate, it is not intended to represent legal, tax or financial advice for any reader of any part of this web site. Due to frequent changes in the laws, new court cases and differences of opinion among professional advisors, readers should not rely on this information without the help of a qualified professional advisor.