Mixed-Income Housing and Income Averaging

Mixed-income housing is a building, development, or neighborhood that deliberately combines homes at different rent or price levels, usually market-rate units alongside income-restricted ones. Income averaging is something narrower. It is a rule in the Low-Income Housing Tax Credit (LIHTC), added in 2018, that lets one tax credit property serve households from 20% to 80% of area median income (AMI), as long as the income limits assigned to its units average 60% or less.

The two ideas meet in practice. Income averaging lets a single tax credit building house both renters with very low incomes and working households earning up to 80% of AMI.

What Counts as Mixed-Income Housing

There is no single agreed definition. HUD’s research office describes mixed-income development as a deliberate strategy of combining units at a variety of rents and prices, including market-rate and subsidized units. The word that matters is “deliberate.” A neighborhood that simply happens to contain a range of incomes is better described as income-diverse.

Projects vary widely. A 2013 Urban Institute review published in HUD’s journal Cityscape found that:

• The upper tier is loosely defined. “Higher-income” households have meant anything from 51% to 200% of AMI, depending on the development.
• The number of tiers differs. Some properties have two income tiers, others have three or more, and some mix rentals with homes for sale.
• The lower-income share ranges from a small percentage of units to more than half.
• Physical integration differs. Some developments mix income groups on the same floor. Others separate them by floor or building, or finish subsidized units to a different standard.

The label alone therefore says little. A tower that is 80% market-rate and a fully income-restricted property with tiers from 30% to 80% of AMI are both called mixed-income. The useful questions are how many homes are restricted, at what income levels, and for how long.

Four Common Routes to a Mixed-Income Property

Inclusionary zoning is a common local route. Grounded Solutions Network counted 1,019 inclusionary housing programs in 31 states and the District of Columbia at the end of 2019, with about two and a half times as many mandatory programs as voluntary ones. See our guide to inclusionary zoning.

Design and Management Choices

HUD’s 2013 review of the field found no evidence of one ideal income mix or layout. It did identify choices that matter:

• Unit quality. Affordable and market-rate units are generally indistinguishable from the outside. Interiors may or may not match. One developer told HUD that a building with a sizable market-rate share has to function like other market-rate buildings in its area.
• Where the restricted units sit. Units can be scattered or clustered. Regulators sometimes step in. Delaware’s rules for income-averaged tax credit properties, for example, require owners to spread each income tier across unit types and sizes.
• Shared spaces. Common entrances, elevators, gardens, and amenities open to everyone give residents reasons to cross paths.
• Property management. Managers handle tenant selection, lease enforcement, and relations among neighbors. A researcher interviewed by HUD stressed that good neighbor relations do not develop on their own.

How Mixed-Income Housing Is Financed

Each tier of a mixed-income project is usually paid for differently, which is the main source of complexity.

Tax credits support only the income-restricted share of a building. The credit is calculated using the applicable fraction, the low-income portion of the property, so market-rate units need other financing. Delaware’s rules, for example, define a mixed-income development as one with at least 20% market-rate units and require applicants to show financing for those units that does not rely on tax credit equity or financing from the state housing authority.

The result is a layered capital stack. HUD describes Boston’s Mission Main, a HOPE VI redevelopment of 535 units, of which 83% were affordable and 17% market-rate. The HOPE VI grant covered only about 31% of the roughly $159 million cost. City infrastructure funds, local grants, tax-exempt bonds, and both 4% and 9% tax credits supplied the rest. A developer interviewed by HUD in 2013 estimated that mixing incomes at least doubles the complexity of an ordinary affordable housing deal, because every funding source brings its own conditions. See how affordable housing gets financed.

Mixed-income projects are often said to “cross-subsidize” themselves. That holds only under certain conditions:

• In inclusionary projects, market-rate rents or sale prices carry the restricted units, usually with an incentive such as extra density. This works where market prices sit well above restricted ones.
• In income-averaged tax credit properties, rents on 70% and 80% units make up for lower rents on 20% to 40% units. That does not replace other subsidies, such as gap financing, that a deal may need.

The LIHTC Average Income Test

Three ways to qualify

Every tax credit property must elect one minimum set-aside test, and the choice is irrevocable.

Congress added the third option in the Consolidated Appropriations Act, 2018 (Public Law 115-141), for elections made after March 23, 2018. Each unit’s maximum rent is 30% of the income limit designated for that unit.

A worked example

Suppose a 60-unit building restricts every unit and elects the average income test.

The 24 units at 80% are possible only because the 30% and 50% units pull the average back down.

The rent math works the same way. Suppose the maximum rent for a two-bedroom at the 60% limit were an invented $1,500 a month. The same apartment would be capped at $2,000 at 80% and $1,000 at 40%. One of each brings in $3,000, the same as two 60% units, provided the local market will actually pay the 80% rent.

From the “cliff” to the qualified group

Regulations proposed in October 2020 would have tested every low-income unit in a project together. If one low-limit unit lost its status, the average of the rest could rise above 60% and the entire project could lose its credits. The risk became known as the “cliff.”

Final regulations published on October 12, 2022, dropped that approach. A project now passes if it contains a qualified group of units that makes up at least 40% of the project and averages 60% or less. The owner identifies the group each year, and credits are calculated on a qualified group as well.

Return to the 60-unit example. Suppose one 30% unit falls out of compliance. The other 59 units average about 60.5%, which is too high. The owner can leave two 80% units out of the group, bringing the remaining 57 units to about 59.8%. Three units earn no credits for that year, but the other 57 still do. An owner can also restore the average by lowering another unit’s designation, if that unit is vacant or its tenant qualifies at the lower limit.

Further rules finalized on September 30, 2025, replaced the temporary procedures issued in 2022. Owners must record each unit’s designation, report their qualified groups to the state agency every year, and may submit a corrected list within 180 days of discovering a reporting error. The 2025 tax law, Public Law 119-21, expanded the supply of credits but left the three income tests unchanged.

What states add

State housing finance agencies can set stricter terms in their Qualified Allocation Plans. Delaware’s 2025–2026 plan is one example. It requires income-averaged projects to average 58% of AMI or less, will not approve rents above HUD’s Fair Market Rent, lets the state reject a skewed unit mix, and charges a higher compliance monitoring fee. It also notes that bond-financed projects must still meet the 20/50 or 40/60 test for the bonds, because Congress did not add income averaging to the bond rules.

What the test changes, and what it does not

• It reaches a little way into the workforce band. Units at 70% and 80% of AMI serve the lower end of workforce housing. Households between 80% and 120% of AMI cannot qualify for tax credit units.
• It can make more places workable. The older tests need many renters with incomes just under 50% or 60% of AMI. Treasury’s 2022 analysis expected a wider range of eligible incomes to make some projects feasible in sparsely populated areas.
• It does not add units overall. Credits are capped and generally oversubscribed. Treasury expected its 2022 rules to have essentially no immediate effect on the number of affordable homes produced.
• It rearranges who is served. Every unit above 60% must be offset by units below it, so the spread of incomes widens while the average does not rise.
• It adds compliance work. Owners track designations unit by unit and report them every year.

What the Research Shows

Supporters of mixed-income housing expected three kinds of benefit: better places to live, real social integration, and less poverty. The evidence is uneven.

The newer evidence on children

A study by Raj Chetty and co-authors, released as a working paper in January 2026, used tax records to compare 262 HOPE VI developments with similar public housing that was not rebuilt. Children who moved into revitalized public housing units earned 16% more at age 30 and were 17% more likely to attend college. Boys were 20% less likely to be incarcerated. Each additional year of childhood spent there raised adult earnings by 2.8%.

The authors attribute much of the gain to greater contact between children in public housing and higher-income peers nearby. Earlier studies of adults had found little such mixing. The result is consistent with the Moving to Opportunity experiment, in which children who moved to low-poverty areas when young earned more as adults, while older children and adults did not.

Limits of the evidence

• Most of it concerns one model. HOPE VI sites were large public housing redevelopments. Research on inclusionary zoning is thinner, though a RAND study of 11 jurisdictions, cited by HUD, found 76% of inclusionary homes in low-poverty neighborhoods. The sources reviewed for this guide include no long-term study of residents in income-averaged properties.
• HOPE VI had costs for original residents. The Congressional Research Service reported that by June 2009 the program had demolished 93,295 public housing units and built or rehabilitated 78,692 replacement units. A federal audit cited in that report found that by 2003 grantees expected only 44% of original residents to return. See public housing in America.
• Mixing alone does not reduce poverty. The 2013 review concluded that adults need direct help with health, education, and jobs, whatever the income mix around them.

The Bottom Line

Mixed-income housing is a method, and its results depend on the particular mix. It reliably delivers better homes in safer places. The strongest recent evidence suggests that children benefit over the long run, while adults’ earnings do not change. Income averaging lets one tax credit property serve households from 20% to 80% of AMI. By itself, it does not increase the amount of housing the credit produces.