Eligible Basis and Qualified Basis

What Is Eligible Basis?

Eligible basis is the part of a building’s cost that can generate Low-Income Housing Tax Credits (LIHTC). It is defined in Section 42(d) of the Internal Revenue Code. For a new building, it is the building’s adjusted basis, essentially its depreciable development cost, at the end of the first year of the credit period.

Qualified basis is the next step. It is the portion of eligible basis that belongs to the affordable units. Credits are calculated on qualified basis, not on total cost.

How It Works

Under Section 42, eligible basis:

• Includes depreciable property in common areas and amenities available to all residential units.
• Excludes land, which is not depreciable, and property that is not residential rental property, such as commercial space.
• Excludes any costs financed with a federally funded grant.

Existing buildings that are bought and rehabilitated can include acquisition cost only if they meet several tests, including a general rule that at least 10 years have passed since the building was last placed in service.

To get qualified basis, eligible basis is multiplied by the applicable fraction. That fraction is the lower of two shares: the share of units that are low-income, or the share of floor space they occupy. The annual credit is qualified basis times the credit rate, which is roughly 9% or 4%. It is claimed each year for 10 years.

A basis boost can raise eligible basis to 130% of its normal amount for buildings in qualified census tracts and difficult development areas, or for buildings a state agency designates. The state-designation option is not available to bond-financed 4% projects.

Example

Suppose a new building has $20 million of eligible basis and 80% of its units are restricted. Its qualified basis is $16 million. At a 9% credit rate, it would generate $1.44 million of credits a year, or $14.4 million over 10 years. With a 130% boost, eligible basis would become $26 million and qualified basis $20.8 million.

Why It Matters for Workforce Housing

Because credits follow basis, every cost decision affects how much equity a project can raise. Adding market-rate units lowers the applicable fraction and so lowers qualified basis. States also cap basis. Delaware’s 2025–2026 allocation plan, for example, sets per-unit eligible basis limits that vary by bedroom count. Developers mixing affordable and workforce units need to model these effects early. For the full picture, see how the Low-Income Housing Tax Credit works.