Affordable housing tax credits (LIHTC): the basics

The Low-Income Housing Tax Credit, 26 U.S.C. 42, is the main federal source of equity for affordable rental housing. A project that restricts units to income-qualified households earns credits over ten years, sold to investors to fund construction.

The income tests

A project meets one minimum set-aside, elected at the start (26 U.S.C. 42(g)(1)):

• 20 percent or more of the units rent-restricted for households at or below 50 percent of area median income;
• 40 percent or more at or below 60 percent; or
• income averaging: 40 percent or more of the units, each designated between 20 and 80 percent of area median income in 10-point steps, averaging no more than 60 percent.

The 9 and 4 percent credits

The applicable percentage is the 70 percent present value credit for new buildings that are not federally subsidized, with a floor of 9 percent, and the 30 percent present value credit for other buildings, with a floor of 4 percent for buildings placed in service after 31 December 2020 (26 U.S.C. 42(b)). The 9 percent credits are awarded competitively by each state's allocating agency; the 4 percent credits are typically paired with tax-exempt bonds.

Compliance

The compliance period is 15 taxable years, followed by an extended use period under an agreement with the state agency (26 U.S.C. 42(i)(1), (h)(6)). Many local programs set their own, longer covenants.

Questions

What are the LIHTC income tests?

20 percent of units at 50 percent of area median income, 40 percent at 60 percent, or income averaging across 40 percent of units with an average no higher than 60 percent (26 U.S.C. 42(g)(1)).

What is the difference between 9 percent and 4 percent tax credits?

The 9 percent credit is the larger, competitively awarded credit for new unsubsidized buildings; the 4 percent credit applies to other buildings and is typically paired with tax-exempt bonds.

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