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Tax credits explained

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What are tax credits? Tax credits reduce the amount of money an individual or corporation owes in taxes. The more tax credits a person or company has, the less they owe in taxes. The federal government uses tax credits to encourage developers to build affordable housing. 

Why does the federal government support the construction of affordable housing? When affordable housing is inaccessible it can drive people to move to less expensive areas, go into debt or become homeless. The U.S. government subsidizes the construction and renovation of privately owned housing units to prevent these issues. In turn, the developer leases units for a cost lower than their value.

How are tax credits distributed? The U.S. government allocates a number of federal tax credits to each state to incentivize the construction of affordable housing. The number of tax credits awarded to affordable housing projects each year is based on the population of the state. 

This year, Montana is awarding $30.6 million in federal tax credits. The state develops criteria for determining whether affordable housing projects are worthy of receiving tax credits. Developers like RCAC who are interested in constructing affordable housing apply for the tax credits by presenting their plans to the state government.

How was Ronan’s Meadowlark Vista awarded the tax credits? According to the Montana State Housing website, the state decides which project to award the credits to by considering whether the project is rural or urban, who is served, how will the housing credits be used most efficiently and will they do the most good possible. According to a press release from Governor Steve Bullock’s office, the Montana Board of Housing narrowed the applicants down to eight finalists. Then the board voted to award the credits to five projects across the state, including the Ronan project. 

How do tax credits fund the construction of affordable housing? Now that the Meadowlark Vista project has been awarded the tax credits, outside investors will “purchase” the tax credits. The investors will give money to the developers in exchange for owing fewer taxes to the federal government. The developers will use the proceeds from the “sale” of the tax credits to fund the construction of the affordable housing units. With the cost of construction covered, the developer can provide housing for a reduced cost, affordable to people who earn low incomes. Reduced rents in low-income housing units are available for those who apply and meet certain income criteria.

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