What Is LIHTC? A Plain-Language Guide to Low-Income Housing Tax Credits
The Low-Income Housing Tax Credit is the most powerful tool for building affordable rental housing in the U.S. — yet it remains poorly understood outside finance and development circles. Here's how it actually works.
The Federal Program Behind Most Affordable Housing
Since Congress created the Low-Income Housing Tax Credit (LIHTC) as part of the Tax Reform Act of 1986, the program has helped finance more than 3.6 million affordable apartment units nationwide — including tens of thousands across California. Yet despite its scale, LIHTC remains poorly understood outside of development and finance circles.
How LIHTC Works
LIHTC is not a direct subsidy. It is a federal income tax credit allocated to developers who agree to rent a portion of their units to low-income households at restricted rents. Here is the basic flow:
- The IRS allocates credits to states based on population. In 2025, California receives approximately $2.90 per resident — one of the largest state allocations in the country.
- States administer the program through a housing finance agency. In California, that is the California Tax Credit Allocation Committee (TCAC).
- Developers apply for tax credits, competing under criteria set by the state's Qualified Allocation Plan (QAP).
- Credits are sold to investors — typically banks and corporations — who use them to offset federal tax liability. This equity flows into the project and covers a large portion of development costs.
- In exchange, the project must rent a minimum percentage of units to households earning at or below a set income threshold (typically 50%–60% of Area Median Income) for at least 30 years.
The Two Types of LIHTC
9% Credits (Competitive)
Used for new construction or substantial rehabilitation, 9% credits are allocated through competitive rounds — TCAC holds two per year. They generally cover 70% of eligible development costs and are highly sought after.
4% Credits (Non-Competitive)
Used with tax-exempt bond financing, 4% credits are available year-round without a competitive application. They cover roughly 30% of eligible costs and are typically layered with other subsidies to close the financing gap.
Who Benefits
LIHTC housing serves households earning between 30% and 80% of Area Median Income (AMI), though most units target the 50%–60% range. In Los Angeles County, that means a family of four earning up to roughly $65,000 per year — teachers, healthcare workers, retail employees, and seniors on fixed income.
California's Role
California receives the largest LIHTC allocation in the nation and layers it with its own programs — the Multifamily Housing Program (MHP), infill infrastructure grants, and state low-income housing tax credits — to make projects financially feasible in high-cost markets.
Understanding LIHTC is the starting point for anyone working in California's affordable housing ecosystem, whether you are a developer, lender, consultant, or community organization.
