Free Guide to Low-Income Housing Tax Credits

What Are Low-Income Housing Tax Credits?

Low-Income Housing Tax Credits (LIHTC) are a federal program created by Congress in 1986 to encourage private developers and nonprofit organizations to build, rehabilitate, and operate rental housing for people with lower incomes. The program works differently than direct government housing assistance. Instead of providing money directly to renters, the federal government gives tax credits to developers and property owners who agree to keep rents affordable for a set period of time.

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Think of a tax credit like a discount on taxes owed. When a developer builds or renovates a housing project using LIHTC, they receive a credit they can use to reduce their federal income tax liability over ten years. This makes the project financially possible for private companies and nonprofits that might not build affordable housing otherwise. According to the National Housing Law Project, LIHTC is the largest federal program supporting the development of affordable rental housing, producing roughly 100,000 units per year.

The program operates through state housing finance agencies in all 50 states, plus Washington D.C. and U.S. territories. Each state receives an annual allocation of tax credits based on its population. State agencies then award these credits to projects that meet program requirements. The credits finance new construction, acquisition of existing buildings with improvements, and rehabilitation of older properties.

Properties developed with LIHTC must serve households earning between 30 and 60 percent of area median income, depending on the specific project. This means a family of four in a major city might need to earn less than $40,000 to $50,000 annually to occupy one of these units. Residents benefit from stable, affordable rents that don't increase rapidly, which provides housing security for vulnerable populations including families with children, elderly people, and people with disabilities.

Practical Takeaway: Understanding that LIHTC creates affordable rental housing through tax incentives rather than direct payments helps clarify how this program functions in your community and why certain apartment complexes can offer lower rents than market-rate properties.

How the Low-Income Housing Tax Credit Program Works

The LIHTC program operates through a multi-step process involving federal legislation, state administration, developer partnerships, and long-term compliance monitoring. Understanding this structure shows why affordable housing development using tax credits takes several years from concept to occupancy.

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First, Congress annually appropriates tax credits to states based on population, with a minimum credit amount per state. For 2023, the total credit amount available nationwide was approximately $3.3 billion per year in housing credits. States distribute these credits competitively to projects that best meet their housing priorities and program requirements. States typically prioritize projects serving lower-income households, developments in high-poverty neighborhoods, and projects operated by experienced nonprofit developers.

Developers and nonprofit organizations prepare detailed applications proposing housing projects. These applications include information about the property location, number of units, target tenant income levels, development timeline, and long-term operating plans. State housing finance agencies review applications against multiple criteria and award credits to selected projects. Competition is intense, with many states receiving two to three times more applications than available credits.

Once a project receives tax credits, developers use these credits to raise capital. They typically combine LIHTC with other funding sources including conventional bank loans, state and local housing funding, grants from nonprofits and foundations, and sometimes additional government programs. This layered financing structure makes projects financially viable while keeping rents affordable.

After the property is developed and occupied, it must comply with program rules for 15 years minimum. Most projects commit to 30-year affordability periods. During this time, the property owner must maintain affordable rents and serve income-restricted tenants. State housing finance agencies conduct regular compliance monitoring, including physical inspections and tenant income verification. Properties must maintain minimum occupancy rates and cannot convert to market-rate housing without repaying tax credits.

Practical Takeaway: Knowing that LIHTC properties must remain affordable for 15 to 30 years means residents can count on stable housing and predictable rent increases, making long-term financial planning more realistic for lower-income households.

Types of LIHTC Properties and Housing Models

LIHTC funds many different types of housing to serve diverse populations with different needs. Properties range from downtown urban apartments to suburban family housing to rural developments. Understanding the variety of housing types available helps renters recognize which LIHTC properties might match their circumstances.

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Family housing using LIHTC typically consists of multifamily apartment complexes with two to four bedroom units designed for households with children. These properties may include amenities like community centers, childcare support, job training programs, and youth activities. Some family properties focus specifically on transitional housing, helping families experiencing homelessness move toward permanent housing stability. According to data from the Corporation for Enterprise Development, approximately 40 percent of LIHTC units serve families with children.

Senior housing represents another major category of LIHTC development. These properties serve residents age 55 or older and typically include accessible features, supportive services, and common areas. Some senior LIHTC properties are independent living communities, while others combine independent units with assisted living or memory care services. The aging population has created significant demand for affordable senior housing, and LIHTC plays a crucial role in meeting this need.

Supportive housing properties combine affordable housing with case management, mental health services, substance abuse treatment, or medical care. These properties serve people experiencing chronic homelessness, individuals with serious mental illness, and people with disabilities. The Housing and Urban Development Department reports that supportive housing using LIHTC has strong outcomes, with studies showing that residents are more likely to maintain housing and access necessary services when housing and support services are integrated.

Special needs housing includes facilities for people with HIV/AIDS, formerly incarcerated individuals, veterans, domestic violence survivors, and people in recovery from substance abuse. Properties may be project-based (linked to specific housing) or scattered-site (units throughout the community). Rural LIHTC housing addresses the particular challenges of affordable housing availability outside urban areas, often serving agricultural workers and small-town residents.

Practical Takeaway: Recognizing the different types of LIHTC properties helps renters understand what housing options might be available in their area and whether any specialized properties serve their particular needs or life circumstances.

Income Limits and Rent Calculations in LIHTC Properties

LIHTC properties serve households at specific income levels, and understanding these income limits is essential for anyone considering this housing. Income limits vary by location based on area median income (AMI). AMI is the midpoint income in a geographic area, with half of households earning more and half earning less. Federal data is updated annually, so income limits change yearly.

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Most LIHTC properties require that 20 percent of units serve households at 50 percent AMI or that 40 percent of units serve households at 60 percent AMI. Some projects use different percentages. For example, a project might require 15 percent of units at 30 percent AMI (serving very low-income households) and additional units at 50 percent AMI. These percentages determine who can rent apartments in that specific development.

To illustrate how income limits work: in a metropolitan area with a four-person household AMI of $80,000, the 50 percent AMI income limit would be $40,000 and the 60 percent AMI limit would be $48,000. A family of four earning $35,000 annually would be within limits for a 50 percent AMI property. The same family earning $50,000 would only qualify for properties with 60 percent AMI limits.

Rents in LIHTC properties are calculated to not exceed 30 percent of the income limit for each unit's affordability level. Using the earlier example, a 50 percent AMI unit with a $40,000 income limit would have a maximum rent of $1,000 monthly (30 percent of $40,000 divided by 12 months). This means rents stay affordable and predictable even if a tenant's income increases, though property owners must recalculate income annually.

Most LIHTC properties require tenant income verification when households first move in and at annual recertification. Tenants must provide documentation of income, such as recent tax returns, pay stubs, or benefit statements. Some households may experience income reductions and become unable to afford even LIHTC rents; in these cases, tenants should discuss circumstances with property management, as some properties have policies allowing residents to remain