LIHTC Basics


The low-income housing tax credit (LIHTC) program was created in via Internal Revenue Code Section 42. The program’s purpose is to incentivize and leverage private-sector investment capital for the creation of rental housing units in each state affordable to households earning 60% or less of “Area Median Income” (AMI).

The program is administered at the state level by state housing finance agencies with each state getting a fixed allocation of credits based on its population. The state housing agency has wide discretion in determining which projects to award credits, and applications are considered under the state’s “Qualified Allocation Plan” (QAP).

The credit is taken over a 10-year period and is calculated according to the “eligible basis” of the property, which include:

  • The cost of new construction/rehabilitation
  • The cost of acquisition of an existing building

Eligible basis is generally determined at the time the building is placed in service and includes only the adjusted basis of the building (including certain items of personal property and site improvements) and does not include the cost of land. Federal grants are excluded from the basis.

The eligible basis is multiplied by the percentage of the units that are “low income”, in accordance with the eligibility requirements described below, to determine the project’s “qualified basis”.

The credits are allocated based on state agency approval, and are used by the property owner. However, due to IRS regulations and program restrictions, the owner of the property often will not be able to use all of the tax credits, and therefore, many LIHTC properties are owned by limited partnerships that include an investor member that can be identified by syndicators like NTCIC.

Basic Rules

Types of Credits

9% credit (70 percent present value)

  • Projects for (1) new construction and (2) the cost of rehabilitating an existing building, if not funded by tax-exempt bonds, can receive a maximum annual tax credit allocation based on a rate which is generally 9% of the project’s eligible basis as an annual tax credit for 10 years.
  • The credit value floats with interest rates but is presently fixed at 9% through 2013.
  • Minimum fifteen (15) year tax credit initial compliance period.
  • Tax credit investors receive allocable share of all tax attributes (e.g. losses)
  • Recapture of tax benefits for noncompliance on a pro-rata basis that burns off 10% annually over 10 years.

4% credit (30 percent present value)

  • 4% of eligible basis allowed as an annual tax credit for 10 years.
  • The cost of acquiring an existing building (but not the land), and projects financed in whole or in part with tax-exempt bonds.
  • Tax credit investors also receive allocable share of all tax attributes, including losses.
  • Tax consequences for non-compliance or change of ownership, unless project remains affordably compliant under new ownership.

Present Value Calculation – The credit percentages are announced monthly by the Internal Revenue Service, but for buildings placed in service between July 30, 2008 and December 31, 2013, the credit for new and rehabilitated buildings that are not financed with tax-exempt bonds is not less than 9%.

New Construction/Substantial Rehabilitation test – A property that undergoes significant repairs resulting in expenditures of a capital nature, which apply to or substantially benefit one or more of the low-income units, and also meet the greater of either 20 percent of the remaining depreciable basis of the building or an average of $6,000 per low-income unit.  These expenditures are measured over a 24-month period selected by the building owner

Income/Occupancy Restrictions

  • Minimum Requirements: 20% of units must be occupied by tenants with incomes below 50% of AMI


  • 40% of units must be occupied by tenants with incomes below 60% of AMI.
    • Election must be made by the time building is placed in service.
    • Requirements must be met in the first year the credits are claimed.
    • Owner receives credits only on units occupied by qualified low-income tenants.
    • Maximum credit award requires 100% low-income occupancy.

*Residents will not be rendered ineligible for occupancy even if they eventually earn a higher income.

Rent Restrictions

  • All units receiving LIHTCs have rent restrictions based on number of bedrooms, imputed household size and AMI.
    • Imputed household size equals number of bedrooms multiplied by 1.5 persons per bedroom (one person for a 0-bedroom unit).
    • Rent is NOT based on tenant’s household size or income but on threshold for imputed household size.
    • Rent cannot exceed 30% of income qualifier (either 50% or 60% for the assumed household size).
      • Income qualification is based on the individual household’s income
      • Maximum rent includes all utilities except telephone.

Difficult to Develop Area (DDA) boost – A 130% bonus is available to projects located in HUD-determined Qualified Census Tracts (QCT’s) that are defined as census tracts in which 50% or more of the households are at or below 60% of area median income, as well as census tracts with a poverty rate of 25% or higher.

Compliance/Extended Compliance States are responsible for monitoring the ongoing development costs, quality and operation of approved projects, as well as notifying the IRS of noncompliance if the project deviates from the applicable requirements. Such a notice can lead to recapture of previously taken credits and inability to claim credits from the project in the future.

Owners of LIHTC properties and their management agents must be able to prove the tenants living in the low income units meet the eligibility requirements of the LIHTC Program and remain eligible throughout their tenancy. The initial eligibility requirements include, but are not limited to, income eligibility, rent restriction, full-time student limitations, and non-exclusion of Section 8 applicants. Also, each year the tenant remains in the low-income unit, a re-examination or recertification must be performed to ensure the tenant continues to remain LIHTC Program eligible. Failure to correctly prove initial eligibility and re-examine continued eligibility is noncompliance and puts the LIHTC owner at risk of losing its credit claim.

Thorough documentation of tenants’ eligibility is required and records must be maintained for each qualified tenant. Records from the first year of participation in the LIHTC Program must be maintained for 21 years from the date the tax return claiming these credits was filed including all extensions and subsequent years records must be maintained for 6 years from the date the tax return claiming the applicable credits was filed including all extensions.

Owners must report on the compliance status of the LIHTC property at least annually to the State Allocation Agency in which it received its credit allocation and State Allocation Agencies are required to monitor and inspect the LIHTC properties in which it has allocated credits.

Owners and their management agents are strongly encouraged and in some cases mandated by their State Allocation Agencies to become certified compliance professionals. Certifications can be obtained by several LIHTC industry groups. Certifications include the National Compliance Professional (NCP), the Site Compliance Specialist (SCS), the Housing Credit Certified Professional (HCCP), the Specialist in Housing Credit Management (SHCM), and the Certified Credit Compliance Professional (C3P).

QAP – state allocation system – Within general guidelines set by the Internal Revenue Service (IRS), state housing agencies administer the LIHTC program according to their individual Qualified Allocation Plan (QAP). State agencies review tax credit applications submitted by developers and allocate the credits. The IRS requires that state allocation plans prioritize projects that serve the lowest-income tenants and ensure affordability for the longest period.


When a transaction twins the federal LIHTC and the federal Historic Tax Credit (HTC), the federal HTC is recognized all at once when the property is placed in service, providing a stronger investment return up front to enhance the 10-year stream of LIHTCs.  The acquisition and rehabilitation of a historic property into tax credit eligible low-income housing has become a popular option for developers. These building are often located at urban cores and are accessible to retail, transit and other services. Many times these properties have been abandoned or blighted, and there is local support for rehabilitation.

There are several differences between the two programs in how the credits are calculated. LIHTCs are calculated as a percentage of eligible basis, which is different than the QRE. Simply stated, eligible basis for the LIHTC is the cost of acquisition (excluding land), plus rehabilitation or new construction, personal property (equipment and appliances) and certain site improvements. Some of the differences between eligible basis and Qualified Rehabilitation Expenditures (QREs) are:

  • Land/soft costs are not QREs, but may be included in eligible basis for the LIHTC.
  • Neither personal property nor any site improvements are included in QREs, but may be included in eligible basis.
  • Enlargements and additions are not QREs, may be included in eligible basis.
  • Costs, which may be capped under state QAPs, i.e. certain construction, consultant and developer fees may be includable as QREs, but may not be included in eligible basis.

To learn more about eligibility, please visit the official HUD website and Novogradac’s online LIHTC resource area.