Housing Tax Credits: How the LIHTC Program Supports Affordable Rental Housing

John David Sarmiento • March 11, 2025

What Is the Low-Income Housing Tax Credit (LIHTC) Program?



The Low-Income Housing Tax Credit (LIHTC) program is a federal initiative designed to increase affordable rental housing. Created under the Tax Reform Act of 1986, it provides tax credits to property developers in exchange for offering units at reduced rent to low- and moderate-income tenants.


Instead of offering direct subsidies, the program partners with state housing finance agencies and the private sector to fund affordable housing projects. This has helped create millions of rental homes for families who struggle to afford market-rate housing.


How Does the LIHTC Program Work?

The LIHTC program operates through a multi-step process involving tax credit allocation, investor participation, and compliance requirements.

1. Tax Credit Allocation

  • Each year, the federal government distributes tax credits to state housing finance agencies based on population.
  • Developers apply for tax credits through a competitive process at the state level.
  • State agencies award credits based on their Qualified Allocation Plan (QAP), which prioritizes housing needs in each state.

2. Investor Participation

  • Developers sell tax credits to investors, such as financial institutions, to raise capital for construction.
  • Investors receive federal tax benefits over a 15-year compliance period, reducing their tax liability.

3. Compliance Period

  • Developers must comply with affordability requirements for at least 15 years.
  • After this period, many properties enter an extended-use phase, keeping rents affordable for an additional 15 years.


Types of Housing Tax Credits

The LIHTC program provides two types of tax credits, each serving different housing needs.

9% Tax Credits

  • Used for new construction or major renovations.
  • Covers a significant portion of development costs.
  • Awarded through a competitive process at the state level.

4% Tax Credits (Paired with Tax-Exempt Bonds)

  • Used to acquire and rehabilitate existing properties.
  • Combined with tax-exempt bonds to lower financing costs.
  • Available to projects that meet minimum affordability requirements.

Each state’s Qualified Allocation Plan (QAP) outlines the selection criteria for both credit types.


Who Qualifies for Tax Credit Apartments?

Eligibility for LIHTC apartments is based on household income compared to the area median income (AMI).

  • 50% to 60% of AMI – Most LIHTC apartments are reserved for tenants within this range.
  • Up to 80% of AMI – Some projects allow moderate-income households under specific guidelines.


Example of AMI-Based Eligibility

If the AMI for a city is $60,000, a household earning:

  • $30,000 (50% of AMI) qualifies for LIHTC housing.
  • $36,000 (60% of AMI) may also qualify, depending on the project.

Each state’s housing finance agency determines the exact income limits for LIHTC properties.


How Do State Housing Finance Agencies Oversee LIHTC?

State Housing Finance Agencies (HFAs) play a central role in:

  • Developing the Qualified Allocation Plan (QAP), which sets priorities for tax credit allocation.
  • Awarding credits to projects that align with state affordable housing goals.
  • Monitoring compliance throughout the required affordability period.


HFAs ensure developers maintain income and rent restrictions to keep LIHTC housing accessible to eligible tenants.


What Are the Benefits of the LIHTC Program?

The LIHTC program benefits tenants, developers, and the communities they serve.

For Tenants

  • Provides affordable housing at reduced rent.
  • Ensures long-term stability in their communities.
  • Requires developers to maintain properties to program standards.

For Developers

  • Reduces development costs through tax credit incentives.
  • Encourages private-sector investment to fund affordable housing.
  • Supports economic development by improving neighborhoods.


Compliance Requirements for LIHTC Housing

To maintain eligibility for tax credits, developers must follow strict compliance guidelines:

  1. Income Limits – Tenants must meet income restrictions based on AMI.
  2. Rent Restrictions – Monthly rent cannot exceed a set percentage of tenant income.
  3. Occupancy Rules – A required percentage of units must be rented to low-income tenants.
  4. Annual Reporting – Developers must submit income and rent data to state agencies.

Failure to comply can result in financial penalties or loss of tax credits.


How Are LIHTC Projects Financed?

Many LIHTC projects use tax-exempt bonds for additional funding.

Advantages of Tax-Exempt Bonds

  • Lower interest rates reduce borrowing costs.
  • Long-term financing provides financial stability.
  • Increased housing availability by supporting more developments.

When combined with 4% LIHTCs, these bonds help finance both new developments and rehabilitated properties.


Challenges Facing the LIHTC Program

Despite its success, the LIHTC program faces several challenges:

  1. High Demand, Limited Supply – Many areas have long waiting lists for tax credit apartments.
  2. Rising Development Costs – Increased construction expenses impact affordability.
  3. Compliance Complexity – Strict rules require diligent management to avoid penalties.

Efforts to expand and improve the program continue at both state and federal levels.


What’s Next for Affordable Housing and Housing Tax Credits?

With demand for affordable rental housing increasing, policymakers are considering enhancements to the LIHTC program, such as:

  • Increasing credit allocations to build more units.
  • Extending the compliance period beyond 15 years.
  • Adjusting income limits to better serve moderate-income households.

Expanding LIHTC could help address the affordable housing crisis and provide more rental opportunities for families in need.


Conclusion: How LIHTC Supports Affordable Housing

The Low-Income Housing Tax Credit (LIHTC) program plays a vital role in creating affordable rental housing.

  • Developers benefit from tax credit incentives and private investment opportunities.
  • Tenants gain access to stable, high-quality, and low-cost rental housing.
  • State agencies oversee compliance to ensure long-term affordability.

Looking to apply for a tax credit apartment? Contact your state housing finance agency to check eligibility and explore available housing options.


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