Low Income Housing Tax Credit (LIHTC)
A federal income tax credit (26 U.S.C. § 42) that subsidizes construction and rehabilitation of affordable rental housing by providing investors a dollar-for-dollar reduction in federal tax liability in exchange for equity investment in affordable housing projects.
Also known as: Low Income Housing Tax Credit, Section 42, tax credit housing
Definition
The Low Income Housing Tax Credit (LIHTC) is a federal tax credit established by the Tax Reform Act of 1986 (26 U.S.C. § 42) that incentivizes private investment in the construction and rehabilitation of affordable rental housing.
Statutory Authority
26 U.S.C. § 42 provides the tax credit framework. The credit is administered by state housing finance agencies (HFAs) through Qualified Allocation Plans (QAPs), subject to IRS oversight.
Credit Structure
Credits are available in two categories:
- 9% credit (70% present-value credit): For new construction or substantial rehabilitation of units not federally subsidized
- 4% credit (30% present-value credit): For acquisition costs and federally subsidized projects (typically paired with tax-exempt bonds)
Affordability Requirements
Projects must maintain affordability for at minimum 30 years (the initial 15-year compliance period plus a mandatory 15-year extended use period). At least 20% of units must be affordable to households at 50% of Area Median Income (AMI), or 40% at 60% AMI (§ 42(g)).
Rent Restrictions
LIHTC rents are capped at 30% of the applicable AMI level for each unit. For a 60% AMI unit, the maximum gross rent is 30% × 60% AMI ÷ 12.
Impact
LIHTC has financed approximately 3.5 million housing units since 1986, making it the largest source of affordable housing development in the United States.
Sources
- 26 U.S.C. § 42, Cornell LII —
cornell-lii - HUD Exchange: LIHTC Database —
hud-exchange
Frequently asked questions
Statutory Authority
U.S.C. § 42 provides the tax credit framework. The credit is administered by state housing finance agencies (HFAs) through Qualified Allocation Plans (QAPs), subject to IRS oversight.
Credit Structure
Credits are available in two categories: % credit (70% present-value credit): For new construction or substantial rehabilitation of units not federally subsidized % credit (30% present-value credit): For acquisition costs and federally subsidized projects (typically paired with tax-exempt bonds)
Affordability Requirements
Projects must maintain affordability for at minimum 30 years (the initial 15-year compliance period plus a mandatory 15-year extended use period). At least 20% of units must be affordable to households at 50% of Area Median Income (AMI), or 40% at 60% AMI (§ 42(g)).
Rent Restrictions
LIHTC rents are capped at 30% of the applicable AMI level for each unit. For a 60% AMI unit, the maximum gross rent is 30% × 60% AMI ÷ 12.
Impact
LIHTC has financed approximately 3.5 million housing units since 1986, making it the largest source of affordable housing development in the United States.
Sources
U.S.C. § 42, Cornell LII — cornell-lii HUD Exchange: LIHTC Database — hud-exchange