Compliance Period
The first 15 tax years of a Low-Income Housing Tax Credit property's life, during which it must meet federal income and rent rules or the IRS can take back part of the credits already claimed.
What Is the Compliance Period?
The compliance period is the 15-year window in which a Low-Income Housing Tax Credit (LIHTC) property answers to the IRS. Section 42 defines it as 15 tax years beginning with the first year of the credit period. That is usually the year the building is placed in service, or the following year if the owner chooses.
The credit period and the compliance period start together but end at different times. Investors receive their tax credits over 10 years, yet the property must keep following the rules for 15. Put simply, the law treats the credit as a 15-year benefit paid out faster.
How It Works
Each year of the compliance period, the owner must show that the property still meets the program’s requirements. These include:
- The minimum share of units set aside for income-qualified households
- Rent limits on those units
- Annual income certifications, where required
- Habitability and inspection standards
The state housing finance agency reviews owner certifications, inspects properties, and files IRS Form 8823 when it finds noncompliance.
If the qualified basis falls from one year to the next, for example because fewer units are rented to income-qualified households at restricted rents, the IRS can recapture credits. Recapture is not a refund of every credit claimed. It reclaims the “accelerated portion” — the extra credits received by taking them over 10 years rather than 15 — on the lost basis, plus interest. Selling the building, or an interest in it, during the period can also trigger recapture, unless the building is reasonably expected to stay in compliance for the rest of the period.
Compliance Period vs. Extended Use Period
| Compliance period | Extended use period | |
|---|---|---|
| Length | 15 tax years | At least 15 more years, often longer by state rule |
| Enforced by | IRS (credit recapture) and state agency | State agency and tenants, through a recorded covenant |
| Main penalty | Loss and recapture of credits | Legal action under the extended use agreement |
Why It Matters for Workforce Housing
The end of year 15 is a turning point. The credits have been used up and the risk of recapture is gone, so investors typically leave the ownership partnership soon afterward, and owners begin to consider refinancing or sale. Once the 14th year of the compliance period has passed, an owner can ask the state to find a buyer through the qualified contract process. Unless the extended use agreement waives that right, a failed search can end affordability early. Knowing when a property’s compliance period ends helps communities spot rent-restricted homes that may soon be at risk.
Sources
- 26 U.S. Code § 42 — Low-income housing credit, subsections (i) and (j) (Cornell LII) (opens in a new tab)
- IRS — IRC §42 Low-Income Housing Credit Audit Technique Guide, Part I (rev. August 2015) (opens in a new tab)
- IRS Publication 5913 — Guide for Completing Form 8823 (Rev. 1-2024) (opens in a new tab)
- HUD User — What Happens to Low-Income Housing Tax Credit Properties at Year 15 and Beyond? (August 2012) (opens in a new tab)
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