4% Tax Credit

What Is the 4% Tax Credit?

The 4% tax credit is the shallower of the two subsidy levels in the Low-Income Housing Tax Credit (LIHTC) program. Section 42 of the Internal Revenue Code calls it a “30 percent present value credit.” Over 10 years, it is meant to be worth about 30% of the cost of a building’s affordable portion in today’s dollars. The 9% credit is worth about 70%.

The 4% rate applies in two main situations:

• Bond-financed projects. New construction or rehabilitation financed with tax-exempt private activity bonds.
• Acquisition. The cost of buying an existing building that will be rehabilitated, even in a 9% deal.

How It Works

The IRS publishes the applicable percentage monthly. For buildings placed in service after December 31, 2020, federal law says it cannot fall below 4%. The floor covers buildings that received a credit allocation after that date or are financed with bonds issued after it. Before that, the rate floated with interest rates and was often lower.

The key feature is access. Under Section 42(h)(4), a building financed substantially with tax-exempt bonds receives credits without needing an allocation from the state’s competitive ceiling. Traditionally, at least 50% of the building’s and land’s aggregate basis had to be bond-financed, known as the 50% test. Public Law 119-21, signed July 4, 2025, added a lower threshold of 25%. The lower test applies to buildings placed in service in tax years beginning after December 31, 2025. To use it, bonds issued after that date must finance at least 5% of the aggregate basis. Buildings that do not meet that condition still face the 50% test.

The credits are not unlimited. The bonds count against each state’s private activity bond volume cap, and the project must still meet the requirements of the state’s Qualified Allocation Plan.

Example

Suppose a bond-financed building has a qualified basis of $20 million. At 4%, it generates $800,000 a year for 10 years, or $8 million in total. A 9% building with the same basis would generate $18 million. The 4% project has to fill a larger gap with debt, state or local gap financing, or deferred developer fees.

Why It Matters for Workforce Housing

Because 4% credits do not depend on winning a competitive round, they offer a route for projects that do not receive 9% credits, including the acquisition and rehabilitation of existing buildings for preservation. Because each project now needs less bond financing to qualify, the 25% test lets the same bond cap stretch across more projects. Still, 4% deals generally serve households at or below 60% of area median income (AMI), or up to 80% for individual units under income averaging. Housing for workers above those limits needs other tools.