The tax credit rate is approximately 4 percent for building acquisition costs, 9 percent for rehabilitation and new construction costs, and 4 percent if a project has federal subsidies or tax-exempt financing. The actual credit rates are published monthly by the IRS, and are based on prevailing Treasury interest rates to provide a "present value" of 30 percent and 70 percent respectively over 10 years. The acquisition credit can only be earned if there is a minimum amount of rehabilitation spending and, with certain exceptions, if ownership has not changed in the previous ten years. Projects in low income census tracts or high cost areas can earn a bonus of 30 percent more credits for rehabilitation or construction spending.

The annual credit amount is the credit rate multiplied by eligible costs or basis for the number of low income housing units where tenant incomes and rents are below  maximums that are published each year by U.S. Dept of HUD. Non-depreciable costs, such as land, and any grants are excluded from eligible costs. The annual amount of tax credits is earned each year over a 10 year period.  Additional units that qualify after the first year earn two-thirds of the annual credit amount for the balance of the 15-year compliance period.

Eligibility: A project must have a minimum of either 20 percent of its units occupied by low income households with incomes less than 50 percent of area median income, or 40 percent of its units occupied by low income households with incomes less than 60 percent of area median income. Income limits are adjusted for household size, and in certain unusually high or low housing cost areas.

Maximum rents are set for each size of unit, based upon 30 percent of maximum income for specified household sizes. The estimated cost of tenant-paid utilities counts toward the maximum rent.

All types of structures, from scattered site single family to high rise elderly, can be built, as long as it is rental housing, although conversion to home ownership can take place after 15 years. Housing can be providing for special needs, such as the homeless, handicapped, and frail elderly. A limited amount of space for community facilities can be included and can earn credits in many projects.

Projects must remain in low income use for at least 15 years, and low income tenants are protected for an additional three years. Low income use can be extended up to a total of 30 years by any buyer exercising a purchase option at a formula price. Alternatively, the state agency can mandate low income use beyond 15 years, or provide incentives for such longer use in the competition to gain tax credits.

Limit on volume: States can allocate credits of $1.95 per capita in 2007, with a $2,275,000 minimum for small states. A built-in inflation adjustment provides for increases in these amounts in future years. Only the first year of 10 years of tax credits counts against the per capita/minimum limit. Projects with tax-exempt financing under a state's private activity bond cap can receive tax credits outside of the state allocation limit.

Applications are submitted to state-designated housing credit agencies. Projects are selected according to the priorities and criteria that are set forth in a credit agency's qualified allocation plan (QAP). A credit agency must award not more than the amount of tax credits a project needs to be feasible.

Unallocated credits can be used by a credit agency in the following year. Owners have two more years to complete projects, if 10% of project costs are spent within six months or by the end of the year.

Recapture of credits can occur if the number of qualified low income units is not maintained for 15 years, if there are housing code or fair housing violations, or upon changes in ownership. Household income can increase up to 40 percent (70 percent in special circumstances) above the current eligibility level and the unit can remain qualified.

Credit agencies are responsible for monitoring and inspecting projects for compliance. Owners must keep detailed records and make certifications as to the various compliance requirements.

Nonprofit organizations are allocated a minimum of 10 percent of total credits in each state.

The amount of tax credits individual investors can use is limited due to passive losses restrictions. The maximum amount that can be used by persons in the highest income tax bracket is $9,900 per year. The typical investors are corporations (other than subchapter S, closely held, and personal service corporations) who can use unlimited amounts of credits, and can use depreciation deductions as well.