Learn About Low-Income Housing Tax Credit Programs

Understanding Low-Income Housing Tax Credits: The Basics

The Low-Income Housing Tax Credit (LIHTC) program represents one of the most significant federal mechanisms for creating and preserving affordable housing in the United States. Established under Section 42 of the Internal Revenue Code in 1986, this program has been instrumental in developing hundreds of thousands of housing units across all 50 states. Rather than providing direct subsidies to residents, the program works by offering tax credits to property developers and investors who commit to maintaining affordable rents for low-income households.

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The fundamental structure of LIHTC operates through a competitive allocation process managed at the state level. Each state receives an annual credit ceiling based on population formulas, and state housing finance agencies distribute these credits to developers who propose projects meeting specific affordability requirements. The credits can be claimed annually for a period of 10 years, creating significant incentive for private investment in affordable housing development. According to the National Housing Law Project, the LIHTC program has generated more than 3.5 million housing units since its inception, making it a cornerstone of American affordable housing policy.

Understanding how this program functions requires recognizing that it primarily benefits property owners and developers rather than directly assisting residents. However, the ultimate result—creation of affordable rental units—directly impacts low-income households seeking stable housing. The program operates in all states and territories, though the amount of credits available varies significantly based on state population and prior-year credits. States with larger populations receive proportionally more credits, creating variations in program availability and competition across different regions.

Practical takeaway: Research your state's housing finance agency website to understand current LIHTC-funded properties in your area. Many state agencies maintain databases of completed projects and upcoming developments, which can help you identify affordable housing options in your community.

Income and Rent Restrictions: How Properties Determine Affordability

Properties developed through the LIHTC program must maintain strict affordability requirements that define who can access the housing and at what rental rates. The program includes two primary options for affordability: the 20/50 test and the 40/60 test. Under the 20/50 test, at least 20 percent of units must serve households earning no more than 50 percent of the area median income (AMI). The 40/60 test requires at least 40 percent of units to serve households with incomes at or below 60 percent of AMI. Most properties across the country use the 40/60 option, which creates broader housing options for moderate-income households.

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Area median income calculations are crucial to understanding affordability restrictions. The U.S. Department of Housing and Urban Development (HUD) determines these income limits annually for every county and metropolitan area in the country. Income limits vary dramatically based on geographic location. For example, median income in San Francisco County significantly exceeds that of rural Mississippi counties, resulting in different absolute income thresholds and rent caps in different regions. A household that would be considered low-income in one state might be ineligible in another based on these geographic variations.

Rent restrictions in LIHTC properties are typically set at 30 percent of the applicable income limit, meaning rent cannot exceed amounts designed to be affordable for target-income households. These rent caps often remain below market rates even after the initial 15-year compliance period ends. Many properties continue affordable operations beyond mandatory compliance timeframes, either through owner choice or additional subsidies from state programs. Some jurisdictions have implemented "long-term affordability" requirements that extend restrictions for 30 years or longer.

The income and rent structure creates an important distinction: not all "affordable" housing serves the lowest-income populations. A property using the 60 percent AMI threshold may be unaffordable for extremely low-income households earning below 30 percent AMI. Understanding these nuances helps households assess whether specific properties align with their financial circumstances. Many LIHTC properties also layer in additional assistance through project-based vouchers or other subsidies that make housing accessible to lower-income families.

Practical takeaway: Before applying to an LIHTC property, verify the specific income limits and rent amounts by asking the property management for their HUD income limits document. Compare these figures against your household income and current housing costs to determine whether the property's affordability restrictions align with your situation.

How LIHTC Properties Operate and Application Processes

LIHTC-funded properties operate as standard rental apartments with standard landlord-tenant relationships, though with affordability protections built into their structure. These are not public housing projects but rather privately-owned properties that receive tax incentives in exchange for maintaining affordable rents and serving specified income ranges. The day-to-day management and operations of LIHTC properties are typically indistinguishable from market-rate apartments from a resident perspective, though financial constraints may sometimes result in different amenities or maintenance standards.

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The application process for LIHTC housing varies by property but generally involves submitting income documentation, employment verification, and rental history information similar to conventional apartment applications. Property managers use this information to verify that prospective residents meet income restrictions. Some properties conduct more rigorous credit and background checks, while others maintain more flexible screening policies. The program does not establish standard national application procedures, allowing individual property owners to establish their own screening criteria within legal bounds.

Key documents typically requested during the LIHTC application process include recent tax returns, pay stubs, and W-2 forms or other income documentation. Self-employed individuals may need to provide additional documentation such as business tax returns or profit-and-loss statements. Properties often request verification of income directly from employers through third-party verification services. For households receiving government benefits, award letters from Social Security, unemployment insurance, or TANF programs serve as documentation. Some properties accept third-party verification services that independently confirm income information.

Wait lists are common at popular LIHTC properties, particularly in high-demand areas with limited affordable housing supply. Major metropolitan areas like New York City, Los Angeles, and Chicago report wait lists ranging from months to years for desirable properties. Some properties in lower-demand areas may have immediate availability. Understanding local market conditions helps households assess realistic timelines for housing access. Applicants should prepare documentation in advance and maintain copies for submission to multiple properties simultaneously.

Practical takeaway: Create a comprehensive application portfolio including recent tax returns (last 2 years), current pay stubs, employment verification letters, and identification copies. Keep this organized in digital and physical formats so you can quickly submit applications to properties that become available, particularly important in competitive markets with wait lists.

Finding LIHTC Properties and Resources in Your Community

Locating LIHTC properties requires exploring multiple information channels since no comprehensive national database exists specifically for prospective residents. However, several resources can help identify affordable housing options in your area. State housing finance agencies maintain lists of completed LIHTC projects, typically organized by county or metropolitan area. These resources usually include property contact information, number of affordable units, and sometimes income limits and rent amounts. Most state agencies provide this information through searchable online databases on their websites.

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HUD's Affordable Housing Search Tool provides one of the most comprehensive national resources, allowing users to search for affordable rental properties by address or geographic area. This tool includes LIHTC properties alongside other affordable housing programs, creating a more complete picture of available options. While not exclusively for LIHTC properties, it includes substantial numbers of tax credit projects in most areas. Users can filter results by number of bedrooms, income limits, and amenities, making targeted searches more efficient.

Local nonprofit organizations focused on housing advocacy and services often maintain current information about LIHTC properties in their service areas. These organizations may provide application assistance, income documentation help, and general housing navigation services. Many nonprofits host housing fairs where multiple property managers gather to accept applications simultaneously, creating efficient opportunities to apply to multiple properties in one event. Community action agencies, public housing authorities, and homeless service providers frequently organize these events or maintain resource lists.

Online platforms including dedicated affordable housing search websites, rental listing sites with affordability filters, and social media pages maintained by state housing finance agencies provide additional pathways to property information. Many individual LIHTC properties maintain their own websites or Facebook pages with current information about availability, application procedures, and income limits. Building relationships with local housing counselors and case managers can provide ongoing information about new projects entering the market and upcoming availability.

Practical takeaway: Contact your state housing finance agency directly and request their current list of LIHTC properties. Visit HUD's Affordable Housing Search Tool and enter your zip code to identify nearby options. Locate local nonprofits providing housing assistance and ask them to connect you with current affordable housing opportunities in your area.