Low-Income Housing Tax Credit (LIHTC)

How It Works

Each year the federal government gives every state a ceiling on the tax credits it can award, based on population, with a minimum for small states. For 2026 the ceiling is the greater of $3.416 per resident or $3,953,600. That reflects a permanent 12% increase enacted in 2025 by Public Law 119-21. A state housing finance agency then awards those credits to specific developments through a competitive process set out in its Qualified Allocation Plan (QAP).

A developer who wins credits sells them to investors, mostly banks and other financial institutions, either directly or through a syndicator. In practice the investor becomes a partner in the entity that owns the property. Investors pay equity up front and claim the credits against their federal taxes over ten years. That equity can cover a large share of construction costs, so the property needs less debt. With less debt to repay, it can afford to charge rents that lower-income households can pay.

There are two kinds of credit:

• The 9% credit is competitive and comes out of the state’s annual ceiling. It is aimed at new construction and substantial rehabilitation, and it is designed to deliver a subsidy worth about 70% of a project’s qualifying costs in present value.
• The 4% credit is designed to deliver about 30% in present value. It does not count against the state’s ceiling when enough of a project is financed with tax-exempt private activity bonds. For buildings placed in service in tax years beginning after 2025, the threshold is 25% of the cost of the building and land, provided bonds issued after 2025 cover at least 5% of that cost. Before Public Law 119-21 lowered it, the threshold was 50%, a rule known as the 50% test.

Who It Serves

The owner makes a one-time, irrevocable choice among three minimum income tests:

• 20/50 — at least 20% of units for households at or below 50% of AMI
• 40/60 — at least 40% of units for households at or below 60% of AMI
• Average income — at least 40% of units, each designated at a limit between 20% and 80% of AMI in 10-point steps, with the designations averaging no more than 60%. This option, known as income averaging, was added in 2018.

Gross rent on a restricted unit, meaning rent plus an allowance for tenant-paid utilities, cannot exceed 30% of the income limit that applies to the unit. That limit assumes a household size based on the number of bedrooms (1.5 people per bedroom, or one person for a studio). It is not based on the actual tenant’s income.

Credits are earned only on a building’s low-income share, so owners have a financial reason to restrict more units than the minimum.

How Long Affordability Lasts

Properties must stay affordable through a 15-year compliance period, during which the IRS can recapture credits for violations. A recorded extended use agreement then adds at least 15 more years, for a minimum of 30. State agencies can require longer terms, and federal law directs them to favor projects that commit to the longest periods.

There are exceptions. The extended use period ends early if the property is lost to foreclosure. It can also end if, after year 14, the owner asks the state agency to find a buyer who will keep the property affordable and the agency cannot present a qualified contract within one year. The agreement or state law can remove that option. If restrictions do end early, existing tenants are protected for three years from eviction without good cause and from rent increases beyond program limits.

Why It Matters for Workforce Housing

LIHTC is the main federal tool for producing affordable rental housing, but it tops out at 60% of AMI, or 80% for individual units under income averaging. Households above that line, which includes much of the workforce housing band, are generally outside its reach. That gap is one reason communities layer state programs, local trust funds, employer partnerships, and land contributions on top of, or instead of, tax credits.

For a step-by-step walk-through, see How the Low-Income Housing Tax Credit Works.