The Low-Income Housing Tax Credit (LIHTC) is a federal program established under Section 42 of the Internal Revenue Code to incentivize private investment in affordable rental housing for low-income households. Since its inception in 1986, the LIHTC program has become the primary tool for financing the construction and rehabilitation of affordable housing in the United States. By offering a dollar-for-dollar reduction in federal tax liability, the program encourages developers and investors to create and maintain affordable rental units, addressing critical housing needs in communities nationwide.
LIHTC operates by allocating tax credits to state housing finance agencies, which then award these credits to developers of qualified affordable housing projects through a competitive process. Developers can use the credits to offset their own federal tax liability or, more commonly, sell them to investors to raise equity for project financing. The program offers two types of credits: a 9% credit for new construction or substantial rehabilitation without federal subsidies, and a 4% credit for projects financed with tax-exempt bonds or federal subsidies. The credits are claimed annually over a 10-year period, provided the property remains in compliance with program requirements.
To qualify for the LIHTC, a project must meet specific income and rent restrictions. The most common qualification tests are the 20/50 test (at least 20% of units occupied by tenants earning no more than 50% of area median income) and the 40/60 test (at least 40% of units occupied by tenants earning no more than 60% of area median income). The average income test is also available, allowing a mix of income levels as long as the average does not exceed 60% of area median income. Developers must make an irrevocable election of the set-aside test when filing IRS Form 8609.
LIHTC certification involves submitting detailed documentation to the IRS and the state agency, including the project’s eligible basis, applicable fraction, and the chosen minimum set-aside. Annual compliance certifications and tenant income verifications are required throughout the compliance period, which lasts at least 15 years, with an extended use period of at least 30 years in most cases.
The low income housing tax credit lihtc is jointly administered by the IRS and state housing credit agencies. State agencies are responsible for allocating credits, monitoring compliance, and reporting noncompliance to the IRS. Each state must develop a Qualified Allocation Plan (QAP) that sets forth selection criteria and preferences for awarding credits, including project location, housing needs, and sponsor characteristics. The IRS enforces compliance through audits and requires annual reporting via Form 8609 and Form 8586.
Recent legislative changes, such as those in the One Big Beautiful Bill, have made permanent certain enhancements to the LIHTC program, including increased state credit ceilings and expanded eligibility for projects financed with tax-exempt bonds.
Investors in LIHTC projects receive a dollar-for-dollar reduction in federal tax liability over a 10-year period, which can significantly improve project feasibility and returns. The equity raised through the sale of credits reduces the amount of debt required, allowing for lower rents and greater affordability. The LIHTC experience also provides investors with stable returns, as the credits are only available if the property remains in compliance with program rules. In addition, some projects may combine LIHTC with other incentives, such as Historic Tax Credits or benefits from qualified opportunity zones, to further enhance financial viability. Organizations often leverage specialized Tax Credits & Incentives Services to maximize the value of these programs and ensure long-term compliance.
A project qualifies for LIHTC if it is a residential rental property that meets one of the minimum set-aside tests (20/50, 40/60, or average income), maintains rent restrictions, and is allocated credits by a state agency under a Qualified Allocation Plan. The property must remain in compliance for at least 15 years, with an extended use period typically required.
The credit is calculated as a percentage (either 9% or 4%) of the project’s qualified basis, which is the product of the eligible basis and the applicable fraction of low-income units. State agencies allocate credits based on their annual credit ceiling, and developers claim the credits over a 10-year period, subject to compliance.
Compliance obligations include maintaining income and rent restrictions, annual tenant income certifications, and submitting required forms to the IRS and state agency. Noncompliance can result in credit recapture. State agencies conduct regular monitoring and report violations to the IRS.
LIHTC credit, which is typically allocated to the owner of the project, but investors can receive the benefits through partnership structures. Credits themselves are not directly transferable, but interests in the partnership or ownership entity can be sold, subject to compliance and recapture rules.
LIHTC can be combined with other incentives, such as Historic Tax Credits or benefits from qualified opportunity zones, to enhance project financing. However, certain limitations and basis adjustments may apply, and careful structuring is required to maximize the combined benefits.
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