Texas Governor Greg Abbott (R) recently signed Texas House Bill (H.B.) 1058, making Texas at least the 28th state, plus the District of Columbia, to offer state low-income housing tax credits to bridge the growing affordable housing gap in the United States. The passage of Texas H.B. 1058 is a result of the bipartisan efforts of bill co-sponsors Craig Goldman (R), Charles Perry (R), James Talarico (D), Nathan Johnson (D), and Drew Springer (R).

The federal Low-Income Housing Tax Credit (Federal LIHTC) subsidizes the acquisition, new construction, and rehabilitation of affordable rental housing for low- and moderate-income tenants. Because multifamily affordable housing projects often cannot generate sufficient profit to warrant a substantial investment, the LIHTC is designed to incentivize private investors to make substantial equity investments in affordable rental housing projects.

Texas H.B. 1058 intends to increase interest and investment in affordable housing projects across Texas by providing state-level low-income housing tax credits (Texas LIHTC) for certain low-income housing developments approved by the Texas Department of Housing and Community Affairs (TDHCA). The Texas LIHTC program allows $25 million of tax credits to be awarded annually and split evenly between projects financed with 9% Federal LIHTC and 4% Federal LIHTC. In addition, for the first year, only 5% of the annual state housing credit ceiling can be awarded to projects previously awarded Federal LIHTC but which haven’t yet closed due to financing gaps, providing a unique and valuable tool given the current market uncertainty around interest rates and construction pricing.

As with the Federal LIHTC, the credit period for the State LIHTC is 10 tax years beginning with the tax year in which a building is placed in service. Additionally, a credit that is not claimed may not be refunded but may be carried back three years (but not prior to January 1, 2026) and carried forward 10 years. Unlike the Federal LIHTC, the State LIHTC can be 100% specially allocated to an investor with a smaller percentage interest in the partnership owning an awarded housing project, thus allowing the Federal LIHTC and State LIHTC to be bifurcated. The State LIHTC can offset franchise and insurance taxes of any entity that owns a direct or indirect interest in a low-income housing development.

Each year, information concerning the performance of the State LIHTC will be included in the integrated state low-income housing plan submitted by TDHCA staff to its governing board, the governor, the lieutenant governor and the speaker of the House of Representatives. Such information will include the following:

• A specific number of qualified developments for which allocation certificates were issued during the previous year and the total number of units supported by each development
• Rents or income set-asides authorized for the development
• A detailed description of each qualified development including the location, household type, and demographic information of the residents intended to be served by the development

While the legislation takes effect on January 1, 2024, and TDHCA can make credit awards to qualified developments beginning on that date, the earliest State LIHTCs can be claimed is on a tax report due on or after January 1, 2026. This time lag is unlikely to be problematic as it will likely take two years for the first awarded projects to close and complete construction. The program sunsets on December 31, 2029.