The tax credits offered for low-income housing (LIH) development can make it a highly desirable investment in some cases. However, before investing your money in a LIH project, you should know the primary drawbacks:

• The partnerships that invest in low-income housing are illiquid, and investors need to be prepared to stay invested for possibly 10-15 years.
• The return on investment carries greater risks because low-income housing may be located in depressed or rundown geographic locations.

Since building low-income housing is often unattractive to developers, the government provides credits against taxes due and additional possible deductions as an incentive. Investors in LIH may also receive cash flow dividends and/or real estate appreciation.

Low-income housing investments are usually suited to the needs of high-net-worth individuals and C corporations, although some middle-income individuals may want to consider LIH investment if they expect federal income tax liabilities over a 10- to 15-year period. States may also set minimum income and minimum net worth levels.

If you are considering this type of investment, consult your professional tax and legal advisors for more specific recommendations concerning your particular situation.