Affordable housing projects often rely heavily on the Low-Income Housing Tax Credit ( LIHTC) to generate investor equity. But savvy developers and investors also try to maximize additional tax benefits—like bonus depreciation, cost segregation, Section 179 expensing, and specialized deductions under the tax code—to enhance overall project returns.
In this article, we break down the interaction between LIHTC and depreciation, key timing rules, and how other deductions can be layered on top of LIHTC benefits. We will also touch on specialized accelerated cost recovery opportunities like Browse this site Qualified Production Property (Section 168(n)) for certain manufacturing-related affordable housing projects.
Understanding the Basics: LIHTC and Depreciation
First, it is critical to understand that the LIHTC itself is a tax credit—meaning it directly reduces tax liability dollar-for-dollar. Depreciation and related deductions, by contrast, are offsets against taxable income. That means both incentives can be used in tandem but in different ways:
- LIHTC reduces tax owed based on the qualified low-income rental portion and compliance with affordability rules. Depreciation and other deductions lower taxable income by writing down the cost of assets over time, or immediately under bonus or Section 179 rules.
This complementary nature allows taxpayers to combine credits and deductions. However, certain limits and eligibility criteria govern the ability to accelerate deductions on LIHTC projects.
Permanent 100% Bonus Depreciation and Timing Rules
Since the Tax Cuts and Jobs Act (TCJA) of 2017, there has been a phased-in “bonus depreciation” which allows taxpayers to immediately expense a large percentage of eligible property cost, rather than capitalizing and depreciating over many years.
Year Bonus Depreciation Percentage 2017-2022100% 202380% 202460% 202540% 202620%Note: New legislation as of mid-2024 has extended 100% bonus depreciation permanently for qualifying property placed in service before January 1, 2027, subject to certain qualification tests. This is a critical date anchor in tax planning for LIHTC projects leveraging bonus depreciation.
Eligible property for bonus depreciation generally includes personal property with a declared recovery period of 20 years or less (like HVAC, appliances, furniture, carpeting), plus certain building components if the project qualifies under Qualified Improvement Property (QIP) rules.
Key point: Real property itself (27.5-year residential real estate basis or 39-year commercial real estate) does NOT qualify for bonus depreciation.
How Timing Impacts LIHTC Project Owners
To use 100% bonus depreciation on eligible components, property must be placed in service by the end of 2026. Projects that begin construction or complete the placed-in-service date after the cutoff generally lose this 100% immediate expensing benefit and transition to stretched-out depreciation periods instead.
Project developers should coordinate construction timing and placed-in-service milestones to take full advantage of bonus depreciation on components that qualify, alongside LIHTC claims.
Cost Segregation and Shorter-Life Components in LIHTC Projects
Think about it: cost segregation is a widely used engineering-based study that identifies and reclassifies parts of a building into shorter class lives for accelerated depreciation. For LIHTC properties, it can substantially increase early-year deductions by moving costs out of the 27.5-year residential property category and into 5-, 7-, or 15-year recovery periods.
Examples of shorter-life components often identified in cost segregation include:
- Non-structural interiors – carpeting, wall coverings Personal property – appliances, furniture (if owned) Land improvements – parking lots, sidewalks (15-year) Specialized equipment related to affordable housing services
Using cost segregation with LIHTC projects means you can combine the tax credit with faster depreciation on specific assets—provided the cost segregation study meets IRS guidelines and is done timely (ideally before filing first-year returns).
Reminder: Placed-in-service dates matter here too—cost segregation benefits lose punch if the project is placed in service after 2026, because the 100% bonus depreciation starts phasing down unless other rules extend it.
Qualified Production Property (Section 168(n)): Potential for Manufacturing-Related LIHTC Projects
Section 168(n) provides a 15-year depreciation life and 100% bonus depreciation for “Qualified Production Property” (QPP), which typically relates to manufacturing buildings and equipment. This provision can create significant tax benefits but applies narrowly.
For LIHTC:
- If your affordable housing project includes a manufacturing facility component—say, onsite production of modular building components—you might claim QPP treatment for that portion of the property. The QPP classification requires the building to be used predominantly (>75%) for qualified production activities during the tax year.
Important: Most purely residential rental projects won’t qualify for QPP, but development of affordable housing that integrates manufacturing processes could explore this possibility to enhance deductions.
Section 179 Expensing: Larger Limits and Phaseouts for Affordable Housing
Section 179 allows immediate expensing of certain tangible personal property placed in service during the year, with limits that have grown significantly in recent years:
Tax Year Maximum Deduction Limit Phase-out Threshold 2023$1,160,000$2,890,000 2024Indexed for inflation (~$1,200,000 projected)IndexedPersonal property placed in service in an LIHTC project—such as appliances, equipment, computers—may qualify for Section 179 expensing, lowering current-year tax liability.
Key caveat: Section 179 expensing is limited by the taxable income derived from the active conduct of a trade or business. LIHTC passive investors may be subject to passive activity limitations that curtail immediate benefit.
Combining LIHTC With Other Deductions: Practical Considerations
Yes, you can generally combine the LIHTC with accelerated depreciation deductions, but successful tax planning requires understanding the interaction between timing, eligibility, and passive activity rules.
Coordinate construction and placed-in-service dates: To utilize 100% bonus depreciation on qualifying components, ensure placed-in-service on or before December 31, 2026. Perform a detailed cost segregation study: This maximizes shorter-life assets eligible for accelerated depreciation or bonus depreciation within the project. Evaluate Section 179 potential: Personal property with eligible cost can qualify, but watch for limits based on business income and phaseouts. Consider passive activity limitations: LIHTC investors may have limited ability to use depreciation deductions to offset other income without active participation or material participation. Check qualified production property eligibility: If you have a manufacturing component, explore Section 168(n) benefits.Quick Sanity-Check Math Example
Imagine a $10M LIHTC project with $2M allocated to personal property and land improvements via cost segregation. https://stateofseo.com/do-i-need-a-cost-segregation-study-to-use-100-bonus-depreciation/ If placed in service before end 2026, you might be able to:
- Immediately expense 100% of $2M under bonus depreciation (potential ~$2M deduction Year 1) Claim LIHTC credits based on eligible basis (say, 9% credit associated with the affordable rental portion) Use Section 179 to expense some personal property items up to business income limits
Combining these benefits properly can accelerate tax deductions, improve cash flow, and and increase project IRR—relative to relying solely on LIHTC credits and straight-line 27.5-year depreciation.
Bottom Line
The tax code allows LIHTC and other deductions such as bonus depreciation, cost segregation, Section 179 expensing, and occasionally Section 168(n) Qualified Production Property deductions to be used together on the same affordable housing project. However, planning ahead is essential since:
- The placed-in-service date anchors bonus depreciation eligibility and percentages. Cost segregation is only valuable if done timely and properly. Section 179 has income-based caps and phaseouts. Passive activity rules may restrict the ability to use deductions for certain investors. Qualified Production Property qualifications are narrow but worth exploring.
Don’t rely on vague claims of “huge savings” without verifying project eligibility, deadlines, and investor circumstances. Instead, anchor your affordable housing tax planning around the placed-in-service cutoffs, conduct thorough cost studies, and examine each deduction’s eligibility carefully before or as you close on your LIHTC project.
Additional Resources
- IRS Publication 946 – How to Depreciate Property Novogradac’s Low-Income Housing Tax Credit Resource Center Cost Segregation Services and Guides