TYPES OF TAX CREDIT RATES – 9% AND 4%
The New Construction / Rehabilitation Credit (the so-called “9% Credit”)
• The 9% credit is the most standard kind of tax credit used with affordable housing projects. It is for affordable rental housing projects and is related to:
– The cost of construction of new residential rental housing, or
– The cost of the substantial rehabilitation of existing residential rental housing.
• Only very rarely is the actual tax credit rate used exactly 9%. The “9%” rate is a rate that is calculated and released monthly by the U.S. Treasury Department. Each month, it reflects the weighted-average cost to the U.S. Treasury of long-term debt with maturities comparable with those for tax credit projects.
• Over the years, the actual “9% rate” has ranged from 8.12% to 9.27%. The rate for July 2014 was 6.10%.
• The amount of the annual tax credits is calculated by multiplying the actual tax credit rate for the month selected to the project’s Qualified Basis.
The New Construction/ Rehabilitation Credit for Federally Subsidized Projects (the so-called “4% Credit”)
• If a project is financed with a federal subsidy – for example it uses tax exempt bond financing or federal HOPWA funds as a special needs project – then the new construction/rehab basis of the project is eligible for a 4% credit, not the standard 9% credit.
• Like the 9% credit, the 4% credit is calculated monthly by Treasury. It has ranged from 3.49% to 4.00%. The Current Rate for August 2014 is 3.89%.
• All other rules defined above for new construction/rehabilitation apply, and there may be additional requirements to be satisfied.
The 4% Acquisition Credit
• Costs associated with the purchase of a building (excluding value of land) can qualify for a 4% tax credit, but only if:
– the building is to be substantially rehabilitated as described above, and
– the building meets requirements for the “10-Year Acquisition Rule” – in short a building meets the rule’s requirements if it has not been sold in the last 10 years and it has not been substantially renovated in the last 10 years.
• The tax credit rate is the same as for the 4% construction/ rehab projects.