# Low-Income Housing Tax Credit (LIHTC): What It Is, How It Works

## What Is the Low-Income Housing Tax Credit?

The Low-Income Housing Tax Credit (LIHTC) is a tax incentive for housing developers to construct, purchase, or renovate rental housing for low-income individuals and families. The LIHTC was written into the Tax Reform Act of 1986.

The LIHTC provides state and local agencies with the authority to distribute around $9 billion annually in federal tax credits. For every dollar of tax credit received, developers can reduce a dollar’s worth of their federal income tax owed.

However, the amount of tax credit available to each developer is determined by the number of low-income housing units the developer plans to build.

To be eligible for low-income rental housing properties, applicants must find an eligible tax-credit property and typically earn less than 60% of the Area Median Income (AMI).  

### Key Takeaways

*   The LIHTC is intended to encourage the development of affordable housing by offering a 10-year tax credit for these projects.
*   The LIHTC program provides the credits to reduce developers’ costs in return for developers agreeing to reserve a certain percentage of rent-restricted units for lower-income families.
*   Most kinds of properties (single-family, multifamily, apartment complexes, and townhouses) can qualify for the LIHTC credit.
*   An LIHTC housing project must rent to tenants whose average income is below the area’s median income, and this commitment must be maintained for a period of 15 years.
*   The tax credit costs the U.S. government an estimated $13.5 billion every year.   
    

## How the Low-Income Housing Tax Credit Works

The LIHTC is intended to stimulate the creation of more affordable housing for low- and middle-income families. The LIHTC program provides the cost-reducing [tax credit](https://www.investopedia.com/terms/t/taxcredit.asp) in return for developers agreeing to reserve a certain percentage of rent-restricted units for lower-income families.  

### Types of Credits

There are two main types of federal tax credits available to developers.

1.  The 9% credit, which can only be used if the building project will have no other credits or government subsidies applied to it
2.  The 4% credit, which can be used in conjunction with federal tax-exempt bond financing

These credits are applied over a 10-year period after a building is placed into service and can cover almost the entirety of the taxable expense for the building.

### Credits Allocated to States

According to federal law, the tax credits are allocated to each state by the federal government. From there, each state may choose the developers that can take advantage of these credits for their housing projects.

Not every developer or investor will be able to take advantage of this program, as there are more applications than available permits issued for construction.

### 3.7 million

The number of affordable housing units that the LIHTC led to the creation of between 1987 and 2023, according to the latest data from the U.S. Department of Housing and Urban Development (HUD).  

## How to Qualify for the Low-Income Housing Tax Credit

A wide variety of properties can be eligible for the LIHTC, including single-family homes, duplexes, apartment complexes, and townhouses.

To qualify, property owners, investors, or developers must meet specific requirements regarding the [income](https://www.investopedia.com/terms/i/income.asp) levels of their tenants and the number of lower-income units offered. A project must meet one of the three income tests:

1.  At least 20% of the rental units are leased to tenants whose income is no more than 50% of the AMI, adjusted for family size.
2.  At least 40% of the rental units are leased to tenants whose income is no more than 60% of the AMI.
3.  At least 40% of the rental units are leased to tenants whose income is no more than 60% of the AMI, and no units are rented to tenants earning more than 80% of the AMI.

All projects receiving the LIHTC must continue to meet one of these income conditions for a period of 15 years. If the project doesn’t comply, the value of the tax credit can be reclaimed.

A frequent criticism of this program is that many properties in sought-after areas often become unaffordable for low-income families after the initial 15-year period.

## Support for People Seeking Low-Income Housing

Low-income housing refers to any housing project or residential building that rents out units to tenants who qualify for reduced rent based on income and family size, or who receive [housing vouchers](https://www.investopedia.com/terms/h/housing-choice-voucher-program.asp) to help make their monthly rental payment.

Low-income housing units can be operated by either a housing authority or private landlords who accept government payments along with the tenant’s rental payment.

There are other types of support available for low-income individuals and households, such as housing subsidies provided by the U.S. [Department of Housing and Urban Development (HUD)](https://www.investopedia.com/terms/u/us-department-housing-urban-development-hud.asp).

The income qualifications can be found on HUD’s website and are subject to change as wages grow or decline in a given area. To qualify, a potential renter’s income must be below 50% of the median income in their region.

While HUD housing subsidies are available to single renters as well as families, there are qualifications for room counts in prospective homes and single renters may be excluded from a housing project due to lack of availability of properly sized units.

> **Tip**
>
> Low-income housing should not be confused with affordable housing, which is for families who are spending more than 30% of their income on housing.

## How Much Does the LIHTC Cost Taxpayers?

The tax credit costs the U.S. government an estimated $13.5 billion every year. In December 2024, the U.S. Congress Joint Committee on Taxation estimated that the LIHTC would cost the United States $15.5 billion by 2028.

## Are There Downsides to the LIHTC?

Criticisms of the LIHTC include that it contributes to inflation of housing prices, leads to areas of higher [poverty](https://www.investopedia.com/terms/p/poverty.asp) levels, and doesn’t properly address the high cost of housing due to the limited term of affordability.

## How Successful Has the LIHTC Program Been?

Although it has its critics, the LIHTC program is considered by some to be quite successful. Affordable housing units continue to enter the market. Less than 1% of the properties have entered [foreclosure](https://www.investopedia.com/terms/f/foreclosure.asp) (fewer than for any other property type). And its market-based approach to housing (partnering private investment and public subsidies) deploys capital effectively.

## What Changes Are Coming to the LIHTC Program?

The One Big Beautiful Act Bill, which President Donald Trump signed into law on July 4, 2025, makes changes to the LIHTC program effective in 2026. These include increasing states’ annual allocation authority to 12% from 9% and lowering the federal tax-exempt bond financing requirement to 25% from 50%.

## The Bottom Line

The LIHTC aims to encourage the development of affordable rental housing for low-income individuals and families. Developers can receive substantial tax credits for building, buying, or renovating properties intended for tenants who earn less than their area’s median income.

Prospective tenants seeking low-income housing must locate a property that qualifies for the tax credit and meet certain income requirements.  

> **Article Sources**
>
> 1.  Federal Register. “[Section 42, Low-Income Housing Credit Average Income Test Regulations](https://www.federalregister.gov/documents/2020/10/30/2020-20221/section-42-low-income-housing-credit-average-income-test-regulations#).”
>     
> 2.  New York State Homes and Community Renewal. “[Low-Income Housing Tax Credit Program (9% LIHTC Program—DHCR Administered)](https://hcr.ny.gov/low-income-housing-credit-program-9pctRFP).”
>     
> 3.  Congressional Research Service. “[An Introduction to the Low-Income Housing Tax Credit](https://sgp.fas.org/crs/misc/RS22389.pdf).” Page 4.
>     
> 4.  Congressional Research Service. “[An Introduction to the Low-Income Housing Tax Credit](https://fas.org/sgp/crs/misc/RS22389.pdf).”
>     
> 5.  National Housing Conference. “[How the 9 Percent Tax Credit Program Works](https://nhc.org/policy-guide/low-income-housing-tax-credit-the-basics/how-the-9-percent-tax-credit-program-works/).”
>     
> 6.  Congressional Research Service. “[An Introduction to the Low-Income Housing Tax Credit](https://sgp.fas.org/crs/misc/RS22389.pdf).” Page 1.
>     
> 7.  Congressional Research Service. “[An Introduction to the Low-Income Housing Tax Credit](https://sgp.fas.org/crs/misc/RS22389.pdf).” Pages 3–4.
>     
> 8.  U.S. Department of Housing and Urban Development, Office of Policy Development and Research. “[Low-Income Housing Tax Credit (LIHTC): Property-Level Data](https://www.huduser.gov/portal/datasets/lihtc/property.html).”
>     
> 9.  Congressional Research Service. “[An Introduction to the Low-Income Housing Tax Credit](https://sgp.fas.org/crs/misc/RS22389.pdf).” Pages 4–5.
>     
> 10.  U.S. Congress Joint Committee on Taxation. “[Estimates of Federal Tax Expenditures for Fiscal Years 2024–2028](https://www.jct.gov/getattachment/765709fb-9a4b-430a-8f9e-4d342ec97f7e/x-48-24.pdf).” Page 26.
>      
> 11.  Banker & Tradesman. “[Low-Income Housing Tax Credits Are Good Business for Banks](https://www.brooklinebank.com/wp-content/uploads/2023/07/BT_Reprint_Abdullah_TaxCredits_071023.pdf).”
>      
> 12.  Affordable Housing Finance. “[The Keys to Success](https://www.housingfinance.com/policy-legislation/the-keys-to-success_o).”
>      
> 13.  Congress.gov. “[H.R.1—One Big Beautiful Bill Act: Text](https://www.congress.gov/bill/119th-congress/house-bill/1/text).”
>      
> 14.  Nixon Peabody. “[Low-Income Housing and Community Development Tax Credits in the Big Beautiful Bill](https://www.nixonpeabody.com/insights/alerts/2025/07/16/low-income-housing-and-community-development-tax-credits-in-the-big-beautiful-bill).”