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What Is LIHTC? The Low-Income Housing Tax Credit Explained
The Low-Income Housing Tax Credit (LIHTC) is a federal tax incentive that funds the construction and rehabilitation of affordable rental housing. Created by the Tax Reform Act of 1986, it is the largest source of affordable housing financing in the United States. In exchange for the credit, developers must keep units rent-restricted and rented to income-qualified households for at least 30 years.
How LIHTC works
The IRS allocates tax credits to state housing finance agencies based on population. Those agencies award the credits to developers, who sell them to investors to raise equity. That equity lowers the project's debt — and therefore the rents it has to charge.
Investors claim the credit against their federal income taxes over a 10-year period, which is what makes the credits valuable enough to fund the affordability.
9% vs 4% credits
There are two LIHTC products. The 9% credit is competitive and covers roughly 70% of a project's eligible cost — it is used mostly for new construction. The 4% credit is non-competitive, covers about 30% of cost, and is paired with tax-exempt private-activity bonds; it is common for acquisition and rehabilitation.
Who qualifies to live in LIHTC housing
Tenants must earn at or below an income limit set as a percentage of Area Median Income (AMI) — commonly 60% AMI or less. Rents are capped (typically about 30% of the income limit) so the housing stays affordable. See our explainers on AMI income limits and how to qualify for affordable housing in California.
Frequently asked questions
What does LIHTC stand for?
LIHTC stands for the Low-Income Housing Tax Credit, a federal program created in 1986 that funds the development of affordable rental housing.
Is LIHTC the same as Section 8?
No. LIHTC is a tax credit that finances the construction of affordable buildings; Section 8 is a rental-assistance voucher that helps tenants pay rent. Many LIHTC properties also accept Section 8 vouchers.
How long do LIHTC units stay affordable?
LIHTC units must remain rent-restricted for a 15-year compliance period plus a 15-year extended-use period — at least 30 years in total.
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