Low-Income Housing Tax Credit (LIHTC)

The Low-Income Housing Tax Credit (26 U.S.C. § 42) is the largest federal program for creating affordable rental housing in the United States — financing the construction or rehabilitation of approximately 110,000 affordable housing units per year and responsible for virtually all affordable rental housing built in the country since its creation in 1986. LIHTC works through the tax code: the federal government allocates tax credits to state housing finance agencies, which award credits to developers of qualifying affordable housing projects. Developers sell these credits to investors (typically banks and corporations) for upfront cash equity, which reduces the amount of debt needed to finance the project and thus the rents needed to service that debt. The result: apartments that can be rented at below-market rates to households earning 60% or less of area median income (AMI) — with affordability restrictions that last at least 30 years. LIHTC has financed over 3.6 million affordable housing units since 1986, at a cost of approximately $13 billion per year in federal tax expenditures.

Current Law (2026)

Legal Authority

• 26 U.S.C. § 42 — Low-income housing credit (establishes the tax credit for qualified low-income housing projects; defines eligible basis, applicable fractions, income and rent restrictions, allocation procedures, compliance requirements, and recapture provisions)
• 26 U.S.C. § 42(g) — Income limitation (units must be occupied by tenants whose income does not exceed 50% or 60% of area median gross income — AMGI — depending on the election made by the project; rent may not exceed 30% of the income limit)
• 26 U.S.C. § 42(h) — Limitation on aggregate credit (each state receives an annual per-capita credit ceiling — adjusted annually for inflation — which state housing finance agencies allocate among qualified projects through a competitive QAP process)
• 26 U.S.C. § 42(m) — Additional responsibilities of housing credit agencies (each state agency must establish qualified allocation plans prioritizing projects serving lowest incomes, in qualified census tracts, and projects with extended use agreements)
• 26 U.S.C. § 42(i)(3)(B) — Extended low-income housing commitment (most projects must agree to maintain rent and income restrictions for 30 years or more as a condition of receiving credits; the extended use agreement is recorded against the property)

How It Works

Under 26 U.S.C. § 42, a developer proposes an affordable housing project to the state housing finance agency, which awards tax credits if the project meets the agency's priorities. The developer then sells these credits to investors — typically through a tax credit syndicator (such as the National Equity Fund, Raymond James Tax Credit Funds, or Enterprise Community Investment) — for approximately $0.85–$0.95 per dollar of credit. The investor receives a dollar-for-dollar reduction in federal income tax liability over 10 years; the developer receives upfront equity that typically covers 60–70% of total project cost. Because the equity reduces debt, the project can charge below-market rents and still cover operating costs and debt service. The two credit types work differently: the 9% credit (producing approximately 70% of qualified basis in present value) is used for new construction and substantial rehabilitation, competitively allocated by state agencies and persistently oversubscribed; the 4% credit (approximately 30% of qualified basis) is used for tax-exempt bond-financed projects and acquisition costs, not competitively allocated but providing less subsidy per unit.

To receive credits, a project must set aside either 20% of units for tenants at 50% AMI or below, 40% of units at 60% AMI or below (the most common election), or use income averaging (added in 2018) with an average income limit of 60% AMI and individual units ranging from 20% to 80% AMI. Rents are capped at 30% of the applicable income limit regardless of what each tenant actually earns — so the maximum rent for a 60% AMI unit in Chicago (approximately $63,000/year for a family of 4 in 2025) would be roughly $1,575/month. These restrictions run for at least 30 years under § 42(i)(3)(B)'s extended use commitment. Each state agency must adopt an annual Qualified Allocation Plan (QAP) governing how 9% credits are scored and awarded — QAPs typically prioritize the lowest-income tenants, longest affordability commitments, and high-opportunity locations, making the QAP the critical document for any developer. During the 30-year compliance period, property owners must certify tenant eligibility annually and submit to state agency inspections; violations can trigger recapture — the IRS requiring investors to repay previously claimed credits with interest and penalties, which is why LIHTC compliance is among the most detailed ongoing regulatory obligations in real estate.

How It Affects You

If you're a renter looking for affordable housing: LIHTC properties are scattered throughout cities and suburbs — they're not all clustered in public housing-style complexes, and many are indistinguishable from market-rate apartments from the outside. How to find them: HUD's Affordable Housing Locator at hudgov.gov, your state's housing finance agency website (search "[state name] housing finance agency affordable housing search"), or the National Housing Preservation Database at preservationdatabase.org — the most comprehensive national database of federally assisted rental properties including LIHTC. Unlike public housing or Section 8 vouchers, LIHTC properties are privately managed and each has its own application process and waiting list — you apply directly to the property or the property management company, not to a government agency. If the income limit is "60% AMI," that means 60% of the Area Median Income for your county or metro area — HUD publishes these limits annually at huduser.gov/datasets/il.html. For example, in 2025, 60% AMI for a family of 4 in Chicago is approximately $63,000/year. LIHTC rents are capped at 30% of 60% AMI — for that Chicago family, that's a maximum rent of roughly $1,575/month for a 60% AMI unit. The key limitation: LIHTC properties have waiting lists, often months to years long. Apply to multiple properties simultaneously rather than waiting for one before trying the next.

If you're an affordable housing developer: LIHTC is your primary equity source, but the 9% credit is severely oversubscribed — most states receive 3-5x more qualified applications than credits to award. The allocation process is governed by each state's Qualified Allocation Plan (QAP) — a critical document that determines how your project will be scored. Before designing a project, read your state housing agency's current QAP carefully: it specifies point criteria (location, income targeting depth, energy efficiency, length of affordability commitment, developer capacity) and bonus categories. The most common QAP mistakes for first-time applicants: underestimating competition from established syndicators and tax credit investors who have existing relationships with the agency; failing to secure site control before applying (most QAPs require evidence of site control); and underestimating post-award compliance requirements (annual tenant certification, physical inspections, compliance reporting) that last 30+ years. The 4% credit paired with tax-exempt bonds is non-competitive and easier to access for projects that can access bond financing — it's a viable path even when 9% credits are unavailable. State and local subsidy stacking (HOME funds, CDBG, state housing trust funds) is essential for many 9% credit deals to be financially feasible.

If you're a bank or corporate investor evaluating LIHTC investments: LIHTC is a dollar-for-dollar federal tax credit — a $1 million credit reduces your federal tax liability by $1 million — delivered over 10 years. Investors typically pay $0.85–$0.95 per dollar of credit (the "equity price"), meaning a $10 million credit package yields $8.5–$9.5 million in equity for the developer. The credit is available only if the project remains in compliance for 15 years; non-compliance triggers recapture — meaning the IRS claws back a portion of credits you've already claimed, plus interest and penalties. This recapture risk is managed through guaranties from the developer or syndicator and through ongoing monitoring by the state agency. For banks subject to the Community Reinvestment Act (CRA), LIHTC investments typically receive full CRA credit as "qualified investments" — which is why banks are the largest LIHTC investors even absent the pure return calculation. The Affordable Housing Credit Improvement Act (periodically introduced in Congress) would expand annual credit allocations by 50% — watch for this as it would significantly increase deal flow and potentially compress equity pricing.

State Variations

LIHTC allocation and implementation vary significantly by state:

• Each state's QAP sets different priorities — some emphasize rural areas, others urban revitalization, others high-opportunity neighborhoods
• State housing finance agencies administer the program with significant discretion in project selection
• Many states supplement LIHTC with state housing tax credits and Community Development Block Grants, increasing the subsidy per project
• State building codes, prevailing wage requirements, and environmental regulations affect development costs
• Local zoning and land use regulations determine where LIHTC projects can be built — NIMBYism remains a major barrier (see Fair Housing Act for anti-discrimination requirements)

Implementing Regulations

• 26 CFR 1.42-1 through 1.42-18 — IRS LIHTC regulations (allocation of credits, qualified basis, eligible basis, applicable fraction, compliance monitoring, recapture, extended use agreements, qualified allocation plans)
• Treasury Revenue Procedure 2024-XX — LIHTC income limits and rent limits (annually updated area median income thresholds for LIHTC qualification)
• IRS Form 8586/8609 — Low-income housing credit computation and allocation certification

Pending Legislation

LIHTC expansion and reform provisions appear in broader housing and tax legislation. See Affordable Housing Programs and Tax Credits & Deductions.

• HR 2460 — RESIDE Act: creates a 5-year pilot to turn blighted commercial buildings into attainable housing using up to $100 million of excess HOME funds. Status: Introduced.
• HR 2361 — Accelerating Home Building Act of 2025: would fund HUD grants to create pre-reviewed designs for small mixed-income buildings, $15M/year for 2027-2031. Status: Introduced.
• HR 2416 — Identifying Regulatory Barriers to Housing Supply Act: would require CDBG recipients to report and plan reforms to local zoning that constrain housing supply. Status: Introduced.

Recent Developments

• LIHTC expansion in OBBBA (2025): The One Big Beautiful Bill Act, signed July 4, 2025, included an expansion of the LIHTC program — a permanent 12% increase in the per-capita allocation (effective 2026) and making the 4% minimum credit rate for bond-financed projects permanent (it had been set at a fixed floor in 2020 and renewed repeatedly). The LIHTC expansion had rare bipartisan support in a highly partisan reconciliation bill, reflecting the program's broad appeal to affordable housing developers, real estate investors, and community development organizations in both red and blue states.
• Construction costs and interest rate headwinds: Rising construction costs (labor and materials up 30-40% from 2020 to 2023) and interest rates near 7% have severely stressed LIHTC project economics. Projects that penciled at 3% interest with 2020 costs no longer work at current rates and costs. Developers are requesting larger tax credit allocations, more subordinate financing from state housing finance agencies, and longer timelines. Some states have seen projects awarded credits unable to proceed to construction ("credit gap" problem), forcing state agencies to reallocate. Despite the headwinds, LIHTC remains the primary mechanism for producing new affordable housing — with roughly 100,000+ units placed in service annually.
• Affordable Housing Credit Improvement Act: Bipartisan legislation to increase the per-capita LIHTC allocation by 50% and expand eligibility has been introduced in multiple Congresses with significant support. Partial expansion made it into the 2025 reconciliation package. Advocates continue pushing for the full 50% increase, which would enable approximately 200,000 additional affordable units over 10 years.
• Opportunity Zones interaction: The IRA and reconciliation legislation created additional investment incentives in low-income areas that interact with LIHTC. Some developers are pairing LIHTC credits with Opportunity Zone deferral to reduce costs further — particularly in areas that qualify for both programs.