Income Averaging

What Is Income Averaging?

Income averaging is one of three ways a property can meet the minimum affordability requirement of the Low-Income Housing Tax Credit (LIHTC). Its formal name is the average income test. Congress added it in March 2018.

Under the two older tests, every affordable unit has the same income ceiling: 50% of area median income (AMI) under the 20/50 test, or 60% under the 40/60 test. Income averaging lets an owner give different units different ceilings, from 20% up to 80% of AMI, as long as they average out to 60% or less. That allows one building to serve both households with very low incomes and working households earning up to 80% of AMI.

How It Works

• Minimum share. At least 40% of the project’s units must qualify. The minimum is 25% for projects in a city with five boroughs and more than 5 million people, a description that fits New York City.
• Unit designations. The owner assigns each affordable unit an income limit of 20%, 30%, 40%, 50%, 60%, 70%, or 80% of AMI. Rent on each unit is capped at 30% of its designated limit.
• The average. The designated limits of the qualifying units must average no more than 60% of AMI.
• Irrevocable choice. Once an owner elects a set-aside test for a project, it cannot switch.

Rules proposed in 2020 raised fears of a “cliff,” in which one noncompliant low-limit unit could push the average above 60% and cost the whole project its credits. Final regulations published in October 2022 instead ask whether the project contains a “qualified group” of low-income units that makes up at least 40% of the project and averages 60% of AMI or less. Rules finalized on September 30, 2025, set the recordkeeping and reporting requirements.

Example

Suppose a 10-unit building elects income averaging and designates every unit:

The four 80% units are allowed only because the four 40% units balance them.

Why It Matters for Workforce Housing

Income averaging is one of the few ways the LIHTC can reach households at 70% or 80% of AMI, the lower end of the workforce housing band, while still serving lower-income tenants. The higher rents on 70% and 80% units can also help support the deeper discounts on 20% to 40% units. The trade-offs are more complex compliance and, in some markets, 80% rents that sit close to market rents. Our guide to mixed-income housing and income averaging covers these trade-offs in more depth.