Low-Income Housing Tax Credit (LIHTC)

Key takeaways

• LIHTC is the federal tax incentive that encourages private developers to build, buy, or renovate rental housing for low-income households.
• Credits are claimed over 10 years; projects must maintain required affordability for at least 15 years.
• Two main credit types exist: the 9% credit (for projects without other federal subsidies) and the 4% credit (often used with tax-exempt bonds).
• The program has produced millions of affordable units but faces criticism around limited-term affordability and local housing-market effects.

Overview

The Low-Income Housing Tax Credit (LIHTC) was created to increase the supply of rental housing affordable to low- and moderate-income households. The federal government allocates tax-credit authority to states, and state housing agencies award credits to qualifying developers. Developers use the credits to reduce federal income tax liability in exchange for committing units to rent-restricted households.

Since its inception, LIHTC has been a primary source of subsidized rental housing in the U.S., contributing to the development of millions of units.

How LIHTC works

• States receive an annual allocation of federal tax-credit authority and run competitive allocation processes to select projects.
• Developers receive a dollar-for-dollar federal tax credit, claimed over a 10-year period after the property is placed in service.
• In exchange, projects must set aside a portion of units for lower-income tenants and keep those units affordable for a compliance period—generally 15 years (with many projects subject to longer affordability requirements through extended-use agreements).

Types of credits

• 9% credit — Typically available for projects that do not receive other federal subsidies; historically covers a larger share of eligible project costs.
• 4% credit — Often used together with federal tax-exempt bond financing and generally covers a smaller portion of project costs.

Allocation and administration

• The federal government allocates credit authority to states. State housing finance agencies apply their Qualified Allocation Plans (QAPs) to award credits to selected projects.
• Not all applicants receive credits; demand generally exceeds supply in many markets.

Qualification requirements (project-level)

A project must meet one of the LIHTC income tests to qualify:
* At least 20% of units are rented to households with income at or below 50% of area median income (AMI), or
At least 40% of units are rented to households at or below 60% of AMI, or
At least 40% of units are rented to households at or below 60% of AMI, with no units rented to households earning more than 80% of AMI.

Owners must maintain the income/rent restrictions for the required compliance period; failure to comply can result in recapture of credits.

What renters should know

• LIHTC units are income-restricted: prospective tenants must meet the income limits set for the property (often tied to AMI and household size). Many LIHTC units target households at or below 60% of AMI.
• Some LIHTC properties also accept Housing Choice Vouchers (Section 8), but acceptance depends on the property owner.
• To find LIHTC properties, contact your state or local housing agency or search listings for “tax credit” or “LIHTC” properties in your area.

Cost and fiscal impact

• The program represents a significant federal tax expenditure. Estimates of the program’s annual cost to the federal government vary; recent figures place it in the tens of billions over multi-year budgets.
• LIHTC has produced a large share of the nation’s subsidized rental housing with relatively low foreclosure rates compared with other property types.

Criticisms and limitations

• Time-limited affordability: the initial compliance period (typically 15 years) can mean units revert to market rents afterward unless extended-use agreements or additional subsidies are in place.
• Local market effects: critics argue LIHTC can contribute to rising local housing prices, or concentrate poverty if projects are clustered in certain neighborhoods.
• Limited supply: demand for credit allocations often outstrips available credit authority, so many proposed developments do not receive awards.

Recent program changes

Legislative changes can alter state allocation levels and program rules. One recent reform increases state allocation authority and adjusts the bond-financing thresholds for the 4% credit, with implementation phased in by affected start dates. (State housing agencies publish details and effective dates for any statutory changes.)

Bottom line

LIHTC remains the primary federal tool for expanding affordable rental housing through private investment. It subsidizes construction and rehabilitation by converting tax benefits into lower development costs, in exchange for long-term rent and income restrictions. While the program has produced millions of units and leverages private capital effectively, its limited affordability term and geographic concentration of projects are important limitations to consider.

Further reading

• U.S. Department of Housing and Urban Development (HUD) — LIHTC resources and data
• Congressional Research Service — “An Introduction to the Low-Income Housing Tax Credit”
• U.S. Congress Joint Committee on Taxation — estimates of federal tax expenditures