Qualified Contract

What Is a Qualified Contract?

A qualified contract is a bona fide offer to buy a Low-Income Housing Tax Credit property at a price set by federal formula. It is an exit route built into the tax code.

To claim credits, an owner must sign an agreement to keep the property affordable for an extended use period of at least 30 years. Section 42(h)(6) allows that period to end early in two cases: foreclosure, or when the owner asks for a qualified contract and none can be found.

How It Works

1. Request. After the 14th year of the 15-year compliance period, the owner sends the state housing agency a written request to find a buyer.
2. Search. The agency has one year to present a qualified contract from a buyer who will keep operating the low-income units as affordable housing.
3. Price. The affordable portion is priced at the applicable fraction of outstanding debt, plus inflation-adjusted investor equity, plus other capital contributions, minus cash distributions. Any market-rate portion, and the land under the whole building, are priced at fair market value under Treasury regulations.
4. Outcome. If the agency presents a qualified contract and the owner rejects it, the restrictions stay in place. If the agency cannot find a buyer, the extended use period ends.

Even then, the law protects current residents. For three years after termination, the owner cannot evict existing low-income tenants without good cause or raise their rents beyond tax credit limits.

The Treasury rules at 26 CFR 1.42-18 apply to owner requests made on or after May 3, 2012.

Criticisms and Limitations

The formula is based on debt and invested equity, not on what the property can earn under rent limits. The resulting price can be more than a buyer who must keep rents restricted is able to pay. When no buyer is found, homes can leave the affordable stock about halfway through the 30-year commitment, which is why the process is a recurring concern in preservation work.

The statute says the early-exit rule does not apply where the agreement or state law is stricter, so states can narrow or remove it. Delaware’s 2025–2026 plan states that applying for credits waives the right to request a qualified contract. For more on keeping these homes affordable, see naturally occurring affordable housing and preservation.