Low-Income Housing Tax Credit (LIHTC) Program Guide

The Low-Income Housing Tax Credit program is the largest source of federal funding for the construction and rehabilitation of affordable rental housing in the United States. Established under Section 42 of the Internal Revenue Code by the Tax Reform Act of 1986, LIHTC operates through a tax credit mechanism rather than direct appropriations, engaging private developers and investors to produce housing that low-income households can afford. This guide explains how the program is structured, who qualifies, how credits are allocated, and where the program's boundaries apply.

Definition and scope

LIHTC (commonly pronounced "lie-tech") is a federal tax expenditure program administered jointly by the Internal Revenue Service (IRS) and state housing finance agencies (HFAs). The program authorizes states to allocate tax credits to developers of qualified low-income rental housing. Developers then sell those credits to private investors — typically through syndicators — who use the credits to offset federal income tax liability over a 10-year period. The equity raised from that sale funds a portion of the development's construction cost, reducing the debt burden and enabling below-market rents.

The IRS issues two distinct categories of credits under Section 42 (26 U.S.C. § 42):

• 9% credits — Used for new construction or substantial rehabilitation not financed with tax-exempt bonds. These are the competitively allocated credits and produce deeper subsidy.
• 4% credits — Used for acquisition, moderate rehabilitation, or projects financed with tax-exempt private activity bonds. These are not subject to the annual per-capita cap and are sometimes called "as-of-right" credits.

Each state receives a per-capita allocation of 9% credits annually. As of 2023, the per-capita amount was $2.75 per resident (IRS Revenue Procedure 2022-38), with a small-state minimum floor. States distribute these allocations through a competitive Qualified Allocation Plan (QAP), which each HFA must adopt and submit to the governor for approval.

LIHTC interacts directly with other programs covered under federal housing assistance programs, including Section 8 project-based rental assistance and HOME Investment Partnerships funds, often layered into the same development.

How it works

A LIHTC transaction follows a structured sequence from application through compliance:

1. Developer application — A developer submits a project proposal to the state HFA under the QAP. Applications are scored on criteria including location, tenant population served, and financial feasibility.
2. Credit reservation — The HFA issues a conditional reservation of credits to selected projects, subject to financing confirmation.
3. Carryover allocation — If a project cannot be placed in service by December 31 of the reservation year, the developer may receive a carryover allocation allowing up to 24 additional months to complete construction, provided at least 10% of the projected basis is expended.
4. Equity syndication — The developer forms a limited partnership or LLC with an investor. The investor contributes equity in exchange for 99% of the tax credits and losses over the compliance period.
5. Placed in service — Once the building is completed and occupied, the developer files IRS Form 8609 to certify the eligible basis and request the formal credit allocation.
6. Annual credit delivery — Investors claim the credit in equal annual installments over 10 years.
7. Compliance monitoring — The state HFA monitors the project for 15 years (the initial compliance period) to verify that income and rent restrictions are maintained. An additional 15-year extended use period typically follows under a recorded land use restriction agreement (LURA), meaning most LIHTC units carry a minimum 30-year affordability commitment.

The credit amount is calculated as a percentage of the "qualified basis" — the portion of the project's eligible basis attributable to low-income units. The applicable credit percentage fluctuates monthly based on IRS tables, though the Consolidated Appropriations Act of 2018 established a statutory minimum of 4% for 4% credits (P.L. 115-141).

Common scenarios

Mixed-income development — A developer builds a 100-unit apartment complex, designating 80 units as low-income set-aside units and 20 as market-rate. Only the 80 qualifying units contribute to the eligible basis, and the credit is applied proportionally to that 80% fraction.

Bond-financed rehabilitation — A nonprofit acquires a deteriorating 60-unit building using tax-exempt bond financing and pairs it with 4% credits. Because bonds cover more than 50% of the aggregate basis, the developer qualifies for 4% credits without competing in the annual QAP cycle, though the project still must satisfy all Section 42 income and rent restrictions.

Layered subsidy project — A development combines LIHTC equity with HUD HOME funds and a Section 8 Housing Choice Voucher project-based contract, allowing rents to be set below even the LIHTC maximum while the project remains financially solvent. HUD rules require that HOME-assisted units not exceed applicable LIHTC rent limits where both programs are present (HUD HOME Program regulations, 24 C.F.R. Part 92).

Rural development — A state HFA's QAP awards priority points to projects in rural areas with documented housing shortages. The developer leverages USDA Section 515 rural rental housing loans alongside LIHTC credits, a combination recognized under the Rural Housing Assistance Programs framework administered by USDA Rural Development.

Decision boundaries

Understanding when LIHTC applies — and when it does not — requires attention to four classification thresholds:

Income targeting election — Developers must elect one of two minimum set-aside tests under Section 42(g)(1):
- At least 20% of units occupied by households at or below 50% of Area Median Income (AMI), or
- At least 40% of units occupied by households at or below 60% AMI.

A third option under the Consolidated Appropriations Act of 2018 (the "income averaging" election) allows units to serve households between 20% and 80% AMI, provided the average income of all LIHTC units does not exceed 60% AMI.

Gross rent restriction — Rents on LIHTC units cannot exceed 30% of the applicable income limit for the unit's designated income tier. Units subject to a tenant-paid utility allowance must have that allowance deducted from the gross rent ceiling. The income limits for housing assistance are published annually by HUD and are the basis for LIHTC rent calculations.

9% vs. 4% credit boundary — The critical determinant is financing structure. If tax-exempt bonds finance 50% or more of the aggregate basis, the project is ineligible for competitive 9% credits but qualifies for 4% credits as of right. Projects financed below that threshold must compete for 9% allocations.

Compliance period vs. extended use — The IRS recapture risk applies for the 15-year compliance period. After that, recapture liability extinguishes, but the LURA typically extends affordability restrictions for another 15 years. Early exit from affordability during the extended use period requires the HFA to conduct a qualified contract process under Section 42(h)(6)(F), which allows qualified nonprofit organizations or tenants the right of first refusal before the owner can seek market conversion. Households researching longer-term affordable housing options, including LIHTC properties, can begin with the housing assistance application process to identify available units in their area.

LIHTC is distinct from direct rental assistance programs: it subsidizes the cost of producing units rather than the cost of renting them to a specific tenant. A household does not apply for a LIHTC credit; instead, they apply to occupy a unit in a LIHTC-assisted development, subject to the development's income qualification requirements. The housing assistance eligibility requirements applicable to LIHTC properties are set by the developer's regulatory agreement, not by a public housing authority waitlist.

The full landscape of federal housing subsidy programs — including how LIHTC fits alongside direct appropriations programs — is covered at the housing assistance authority index.