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What Is LIHTC? A Guide to the Low-Income Housing Tax Credit

Definition

LIHTC (Low-Income Housing Tax Credit) is a federal tax incentive program that encourages private developers to build and rehabilitate affordable rental housing, in exchange for tax credits they can sell to investors for equity financing.

Most affordable housing in the United States is not built with government grants. It is built with private capital, encouraged by a tax credit most renters have never heard of. LIHTC is that credit, and it is the largest source of affordable housing financing in the country. Understanding how it works matters whether you are underwriting a deal, evaluating a potential rental, or just trying to make sense of an industry that runs on acronyms.

How LIHTC Works

LIHTC was created under the Tax Reform Act of 1986, made a permanent part of the tax code in 1993, and is administered under Section 42 of the Internal Revenue Code. Rather than giving developers cash, the federal government issues tax credits to state housing finance agencies, which then award them to private developers through a competitive application process.

Tax credits: A dollar-for-dollar reduction in federal tax liability, distinct from a deduction, which only reduces taxable income.

Developers rarely have the tax liability to use these credits themselves, so they typically sell them to investors, usually banks or other institutions with real tax obligations to offset. The sale generates equity the developer can put into the project instead of taking on more debt. Less debt means lower carrying costs, which is what allows the property to charge below-market rents and still work financially.

9% and 4% Credits

LIHTC comes in two forms, and the difference determines how much of a project's cost gets subsidized.

9% credits are the more competitive of the two, awarded through a state application process, and are generally used for new construction or substantial rehabilitation that is not already receiving other federal subsidies. Over the 10-year credit period, they cover roughly 70% of a project's eligible basis.
4% credits are non-competitive and awarded automatically to projects financed with tax-exempt bonds, typically covering roughly 30% of eligible basis. This is usually the path for acquisition and rehabilitation of existing buildings.

Eligible basis: The portion of a project's development costs that qualifies for the tax credit calculation, generally construction costs excluding land.

How LIHTC Rent Limits Are Calculated

This is the part that actually determines what a tenant pays, and it is the exact calculation our LIHTC Rent Calculator runs.

LIHTC max rent starts with the Area Median Income (AMI) for the county, adjusted for household size. HUD publishes these figures annually. The imputed household size is based on unit size, using 1.5 persons per bedroom, so a one-bedroom unit is treated as a 1.5-person household and a two-bedroom unit as a 3-person household.

Area Median Income (AMI): The midpoint household income for a given county or metro area, published annually by HUD and used as the basis for LIHTC income and rent limits.

Max gross rent is 30% of that income figure, divided by 12. From there, if tenants pay their own utilities, the property owner subtracts a utility allowance to arrive at net max rent, the actual amount a tenant can be charged.

Who Qualifies for LIHTC Housing

Every LIHTC property must meet a minimum set-aside test, chosen by the developer at the outset:

20/50 test: At least 20% of units occupied by tenants at or below 50% AMI
40/60 test: At least 40% of units occupied by tenants at or below 60% AMI
Income averaging: At least 40% of units averaging 60% AMI, with no unit above 80% AMI

Whichever test applies, prospective tenants must be income-certified before move-in, and property management is required to recertify income periodically throughout the compliance period.

LIHTC vs. HUD: What's the Difference

This is one of the most common points of confusion, and the short answer is that LIHTC and HUD are not the same program.

HUD (the Department of Housing and Urban Development) administers a range of federal housing programs, including public housing and Section 8 vouchers, which are funded through direct subsidies. LIHTC is a tax credit program, not a HUD program. It is administered by the IRS and state housing finance agencies, though HUD does publish the income limit data that LIHTC calculations are built on. In practice, the two systems intersect constantly, but they are structurally different: HUD's core programs subsidize tenants directly, while LIHTC subsidizes developers to build housing that tenants can afford.

The Compliance Period

LIHTC properties must maintain their income and rent restrictions for a minimum of 15 years, known as the compliance period. Most states also require an extended use period, bringing the total affordability commitment to 30 years. Violating these requirements during the compliance period can trigger recapture, meaning the developer has to repay tax credits already claimed.

Compliance period: The minimum 15-year window during which a LIHTC property must maintain its income and rent restrictions or risk credit recapture.

The end of the 15-year compliance period is known as Year 15, a decision point where owners typically choose to continue operating under extended-use restrictions, restructure ownership, or exit the program through a qualified contract.

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FAQ

What is the difference between LIHTC and HUD?

They are not the same program. HUD administers direct housing subsidies like public housing and Section 8 vouchers. LIHTC is a tax credit program administered by the IRS and state housing finance agencies. HUD's role in LIHTC is limited to publishing the income limit data that rent calculations are based on.

What is the eligible basis in LIHTC?

Eligible basis is the portion of a project's development costs that qualifies for the tax credit calculation, generally construction and rehabilitation costs, excluding land. It is multiplied by the applicable fraction of low-income units to arrive at the qualified basis, which is the actual number the 9% or 4% credit rate is applied to.

How much does LIHTC pay?

LIHTC does not pay tenants or developers directly. It is a tax credit, claimed by investors over a 10-year period, sized to a percentage (9% or 4%) of the project's qualified basis. The value to a specific project depends entirely on its size and eligible basis, so there is no fixed dollar amount the program pays.

How do I calculate LIHTC rent limits for my county?

Rent limits depend on your county's Area Median Income, the applicable AMI percentage under your set-aside election, and your unit's imputed household size. Our LIHTC Rent Calculator pulls current HUD data automatically and calculates gross and net max rent by unit type and AMI bracket.

In Summary

LIHTC is a federal tax credit program, not a direct subsidy, that encourages private developers to build and rehabilitate affordable rental housing.
Developers sell 9% or 4% tax credits to investors to raise equity, which lowers debt and allows lower rents to still work financially.
Max rent is calculated as 30% of a household's imputed income, based on AMI and unit size, minus any utility allowance.
LIHTC properties must maintain income and rent restrictions for a minimum 15-year compliance period, and are administered separately from HUD's direct housing programs.