An Introduction to the Low-Income Housing Tax Credit

An Introduction to the Low-Income Housing
January 26, 2021June 23, 2022
Tax Credit
Mark P. Keightley
The low-income housing tax credit (LIHTC) program is The low-income housing tax credit (LIHTC) program is the federal government’s primary policy the federal government’s primary policy
Specialist in Economics Specialist in Economics
tool for encouraging the development and rehabilitation of affordable rental housing. The tool for encouraging the development and rehabilitation of affordable rental housing. The

program awards developers federal tax credits to offset construction costs in exchange for program awards developers federal tax credits to offset construction costs in exchange for
agreeing to reserve a certain fraction of units that are rent-restricted agreeing to reserve a certain fraction of units that are rent-restricted and for lower-income for lower-income

households. The credits are claimed over a 10-year period. Developers need upfront financing to households. The credits are claimed over a 10-year period. Developers need upfront financing to
complete construction so they will usually sell their tax credits to outside investors (complete construction so they will usually sell their tax credits to outside investors (e.g., corporations,mostly financial institutions) financial institutions)
in exchange for equity financing. The equity reduces the financing developers would otherwise have to secure and allows tax in exchange for equity financing. The equity reduces the financing developers would otherwise have to secure and allows tax
credit properties to offer more affordable rents. The LIHTC is estimated to cost the credit properties to offer more affordable rents. The LIHTC is estimated to cost the federal government an average of approximately government an average of approximately
$10.9 billion annually.$10.9 billion annually.
The 2018 Consolidated Appropriations Act (P.L. 115-141) made two changes to the LIHTC program. First, the act increased
the amount of credits available to states each year by 12.5% for years 2018 through 2021. This modification appeared to be in
response to concerns over the effects of P.L. 115-97, commonly referred to as the Tax Cuts and Jobs Act (TCJA). The
changes made by TCJA did not directly alter the LIHTC program; however, the act reduced corporate taxes, which had the
potential to reduce demand for LIHTCs. Second, the act modified the so-called “income test,” which determines the
maximum income an LIHTC tenant may have. Previously, each individual tenant was required to have an income below one
of two threshold options (either 50% or 60% of area median gross income [AMI], depending on an election made by the
property owner). With the modification, property owners may use a third income test option that allows them to average the
income of tenants when determining whether the income restriction is satisfied, but no tenant may have an income in excess
of 80% of AMI.
To assist certain areas of California that were affected by natural disasters in 2017 and 2018, the Further Consolidated
Appropriations Act, 2020 (P.L. 116-94) increased California’s 2020 LIHTC allocation by the lesser of the state’s 2020
LIHTC allocations to buildings located in qualified 2017 and 2018 California disaster areas, or 50% of the state’s combined
2017 and 2018 total LIHTC allocations.
Most recently, In May 2022, the Biden Administration released a plan to address rising housing costs by encouraging an expansion of the housing supply. The plan calls for adopting proposed expansions of the LIHTC program that were included in various iterations of the Build Back Better Act (BBBA; H.R. 5376), and adopting a modification in the President’s FY2023 Budget proposal that would allow for an increased LIHTC subsidy for certain developments financed with tax-exempt bonds. A number of the proposals in the BBBA and the modification in the President’s FY2023 Budget proposal are similar or related to proposals contained in the Affordable Housing Credit Improvement Act of 2021 (S. 1136/H.R. 2573). The Affordable Housing Credit Improvement Act of 2021 includes a broader set of changes to the LIHTC program. A previous version of that bill was introduced in the 116th Congress. The most recent legislative changes to the LIHTC program were included in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated
Appropriations Act, 2021 (P.L. 116-260),Appropriations Act, 2021 (P.L. 116-260), sets which set a minimum credit (or “floor”) of 4% for the housing tax credit typically used a minimum credit (or “floor”) of 4% for the housing tax credit typically used
for the rehabilitation of affordable housing. The Joint Committee on Taxation (JCT) estimates this change will reduce federal for the rehabilitation of affordable housing. The Joint Committee on Taxation (JCT) estimates this change will reduce federal
revenues by $5.8 billion between FY2021 and FY2030. This change is permanent.revenues by $5.8 billion between FY2021 and FY2030. This change is permanent.
Division EE of P.L. 116-260 Division EE of P.L. 116-260 also increased, for calendar years 2021 and 2022, the credit allocation authority for buildings also increased, for calendar years 2021 and 2022, the credit allocation authority for buildings
located in any qualified disaster zone, defined as that portion of any qualified disaster area which waslocated in any qualified disaster zone, defined as that portion of any qualified disaster area which was determined by the determined by the
President during the period beginning on January 1, 2020, and ending on the date which is 60 President during the period beginning on January 1, 2020, and ending on the date which is 60 daydays from enactment of P.L. from enactment of P.L.
116-260.116-260. For 2021For 2021 , the increase the increase iswas equal to the lesser of $3.50 multiplied by the population residing in a qualified disaster equal to the lesser of $3.50 multiplied by the population residing in a qualified disaster
zone, and 65% of the state’s overall credit allocation authority for calendar year 2020. For 2022, the increase iszone, and 65% of the state’s overall credit allocation authority for calendar year 2020. For 2022, the increase is equal to any equal to any
unused increased credit allocation authority from 2021 (i.e., 2021 increased credit allocation authority may be carried over to unused increased credit allocation authority from 2021 (i.e., 2021 increased credit allocation authority may be carried over to
2022). Buildings impacted by this provision will also be granted a one-year extension of the placed in service deadline and 2022). Buildings impacted by this provision will also be granted a one-year extension of the placed in service deadline and
the so-called 10% test. The JCT estimates these changes will reduce federal revenues by $887 millionthe so-called 10% test. The JCT estimates these changes will reduce federal revenues by $887 million between FY2021 and FY2030. between FY2021 and
FY2030.
There were also a number of bills introduced in the 116th Congress that would have made targeted changes to the LIHTC
program. These proposals included H.R. 4984, H.R. 4865 and S. 767, H.R. 4689, H.R. 3479 and S. 1956, and H.R. 3478.
Broader changes to the program were proposed by the Affordable Housing Credit Improvement Act of 2019 (H.R. 3077/S.
1703).

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link to page 4 link to page 4 link to page 5 link to page 6 link to page 7 link to page 7 link to page 7 link to page 8 link to page 9 link to page 10 link to page 4 link to page 4 link to page 5 link to page 6 link to page 7 link to page 7 link to page 7 link to page 8 link to page 9 link to page 10 An Introduction to the Low-Income Housing Tax Credit

Contents
Overview ......................................................................................................................................... 1
Types of Credits ............................................................................................................................... 1
Minimum Credit Rates .............................................................................................................. 2
An Example ..................................................................................................................................... 3
The Allocation Process .................................................................................................................... 4
Federal Al ocationAllocation to States ...................................................................................................... 4
State Allocation to Developers .................................................................................................. 4
Developers and Investors .......................................................................................................... 5
Recent Legislative Developments ................................................................................................... 6

Contacts
Author Information .......................................................................................................................... 7

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An Introduction to the Low-Income Housing Tax Credit

Overview
The low-income housing tax credit (LIHTC) program, which was created by the Tax Reform Act The low-income housing tax credit (LIHTC) program, which was created by the Tax Reform Act
of 1986 (P.L. 99-514), is the federal government’s primary policy tool for the development of of 1986 (P.L. 99-514), is the federal government’s primary policy tool for the development of
affordable rental housing. LIHTCs are awarded to developers to offset the cost of constructing affordable rental housing. LIHTCs are awarded to developers to offset the cost of constructing
rental housing in exchange for agreeing to reserve a fraction of rent-restricted units for lower-rental housing in exchange for agreeing to reserve a fraction of rent-restricted units for lower-
income households. Though a federal tax incentive, the program is primarily administered by income households. Though a federal tax incentive, the program is primarily administered by
state housing finance agencies (HFAs) that award tax credits to developers. Developers may state housing finance agencies (HFAs) that award tax credits to developers. Developers may
claim the tax credits in equal amounts over 10 years once a property is “placed in service,” which claim the tax credits in equal amounts over 10 years once a property is “placed in service,” which
means it is completed and availablemeans it is completed and available to be rented. Due to the need for upfront financing to to be rented. Due to the need for upfront financing to
complete construction, developers complete construction, developers typical y sel typically sell the 10-year stream of tax credits to outside the 10-year stream of tax credits to outside
investors (investors (e.g., corporations,mostly financial institutions) in exchange for equity financing. The equity financial institutions) in exchange for equity financing. The equity
that is raised reduces the amount of debt and other funding that would otherwise be required. that is raised reduces the amount of debt and other funding that would otherwise be required.
With lower financing costs, it becomes With lower financing costs, it becomes financial yfinancially feasible for tax credit properties to charge feasible for tax credit properties to charge
lower rents, and lower rents, and thus, potentiallythus, potential y expand the supply of affordable rental housing. The LIHTC expand the supply of affordable rental housing. The LIHTC
program is estimated to cost the government an average of $10.9 program is estimated to cost the government an average of $10.9 bil ion annual ybillion annually.1 .1
Types of Credits
There are two types of LIHTCs available to developers. The so-There are two types of LIHTCs available to developers. The so-cal edcalled 9% credit is 9% credit is general y
generally reserved for new construction and is intended to deliver up to a 70% subsidy. The so-reserved for new construction and is intended to deliver up to a 70% subsidy. The so-cal edcalled 4% 4%
credit is credit is typical ytypically used for rehabilitation projects utilizing at least 50% in used for rehabilitation projects utilizing at least 50% in federal yfederally tax-exempt tax-exempt
bond financing and is designed to deliver up to a 30% subsidy. This report bond financing and is designed to deliver up to a 30% subsidy. This report wil will also refer to the also refer to the
4% credit as the “rehabilitation tax credit” and the 9% credit as the “new construction tax credit” 4% credit as the “rehabilitation tax credit” and the 9% credit as the “new construction tax credit”
to facilitate the discussion.2 The 30% and 70% subsidy levels are computed as the present value to facilitate the discussion.2 The 30% and 70% subsidy levels are computed as the present value
of the 10-year stream of tax credits divided by the development’s qualified basis (roughly the cost of the 10-year stream of tax credits divided by the development’s qualified basis (roughly the cost
of construction excluding land).3 The subsidy levelsof construction excluding land).3 The subsidy levels (30% or 70%) are explicitly specified in the (30% or 70%) are explicitly specified in the
Internal Revenue Code (IRC).4 Internal Revenue Code (IRC).4

1 Computed as 1 Computed as the average estimated tax expenditure the average estimated tax expenditure associat edassociated with the program between FY2020 and FY2024. with the program between FY2020 and FY2024. T hisThis
figurefigure does not include revenue loss associated with the changes to the does not include revenue loss associated with the changes to the LIHT CLIHTC program enacted by the Consolidated program enacted by the Consolidated
Appropriations Act, 2021 (P.L. 116-260). Appropriations Act, 2021 (P.L. 116-260). T heseThese change are estimated to reduce federal revenues by $6.7 billion change are estimated to reduce federal revenues by $6.7 billion
between FY2021 and FY2030. U.S. Congress,between FY2021 and FY2030. U.S. Congress, Joint Committee on Joint Committee on T axation, Estim atesTaxation, Estimates of Federal Tax Expenditures
for Fiscal Years 2020-2024, , committee printJCX-23-20, November 5, 2020, November 5, 2020, JCX-23-20; and Joint Committee on ; and Joint Committee on T axation,
Estim atedTaxation, Estimated Budget Effects of the Revenue Provisions Contained in Rules Com m itteeCommittee Print 116 -68, the “Consolidated
Appropriations Act, 2021,,” JCX-24-20, December 21, 2020. JCX-24-20, December 21, 2020.
2 2 T hese labels These labels represent generalizations about the use of the 4% and 9% credits and are a helpful wayrepresent generalizations about the use of the 4% and 9% credits and are a helpful way to think about the to think about the
two different types of credits. two different types of credits. T heThe 9% credit is also commonly referred to as the “competitive credit” because awards 9% credit is also commonly referred to as the “competitive credit” because awards of of
9% credits are drawn9% credits are drawn from a state’s annual from a state’s annual LIHT CLIHTC allocation authority and developers must compete for an award. allocation authority and developers must compete for an award. T heThe
4% credit is4% credit is also commonly referred to as the “non-competitive credit” or “automatic credit” because developers do not also commonly referred to as the “non-competitive credit” or “automatic credit” because developers do not
have to compete for an award if at least 50% of the development is financed with taxhave to compete for an award if at least 50% of the development is financed with tax -exempt bond financing; they are -exempt bond financing; they are
automatically awardedautomatically awarded 4% tax credits. 4% tax credits. T heseThese 4% tax credits are not drawn from a state’s annual 4% tax credits are not drawn from a state’s annual LIHT CLIHTC allocation allocation
authority. authority.
3 The3 T he present value concept allows for the comparison of dollar amounts that are received at different points in time present value concept allows for the comparison of dollar amounts that are received at different points in time
since, for example, a dollar received today has a different value than a dollar received in five years becausesince, for example, a dollar received today has a different value than a dollar received in five years because of the of the
opportunity to earn a return on investments. Effectively, a dollar received today and a dollar received in five years are opportunity to earn a return on investments. Effectively, a dollar received today and a dollar received in five years are
in different currencies. in different currencies. T heThe present value calculation converts dollar amounts received at different points in time into a present value calculation converts dollar amounts received at different points in time into a
common currency—today’s dollars. common currency—today’s dollars.
4 IRC §42(b). 4 IRC §42(b).
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An Introduction to the Low-Income Housing Tax Credit

The U.S. Department of the Treasury uses a formula to determine the credit rates that The U.S. Department of the Treasury uses a formula to determine the credit rates that wil
will produce the 30% and 70% subsidies each month. The formula depends on three factors: the credit produce the 30% and 70% subsidies each month. The formula depends on three factors: the credit
period length, the desired subsidy level, and the current interest rate. The credit period length and period length, the desired subsidy level, and the current interest rate. The credit period length and
the subsidy levels are fixed in the formula by law, while the interest rate changes over time the subsidy levels are fixed in the formula by law, while the interest rate changes over time
according to market conditions. Given the current interest rate, the Treasury’s formula determines according to market conditions. Given the current interest rate, the Treasury’s formula determines
the two different LIHTC rates that deliver the two desired subsidy levels (30% and 70%).5 In the two different LIHTC rates that deliver the two desired subsidy levels (30% and 70%).5 In
addition, for certain projects, the resulting credit rates may not be below a minimum (or “floor”) addition, for certain projects, the resulting credit rates may not be below a minimum (or “floor”)
of 4% or 9% (depending on the subsidy level), discussed in more detail below. of 4% or 9% (depending on the subsidy level), discussed in more detail below.
Once the credit rate has been determined, it is multiplied Once the credit rate has been determined, it is multiplied by the development’s qualified basis to by the development’s qualified basis to
obtain the amount of LIHTCs a project obtain the amount of LIHTCs a project wil will receive each year for 10 years. The credit rate stays receive each year for 10 years. The credit rate stays
constant throughout the 10-year period for a given development, but varies across LIHTC constant throughout the 10-year period for a given development, but varies across LIHTC
developments depending on when construction occurred and the prevailing interest rate at that developments depending on when construction occurred and the prevailing interest rate at that
time. time.
Minimum Credit Rates
The rehabilitationThe rehabilitation and new construction tax credits have ordinarily not been 4% and 9%. The Tax and new construction tax credits have ordinarily not been 4% and 9%. The Tax
Reform Act of 1986 (P.L. 99-514) specified that buildings placed in service in 1987 were to Reform Act of 1986 (P.L. 99-514) specified that buildings placed in service in 1987 were to
receive exactly a 4% or 9% credit rate. Buildings placed in service after 1987 were to receive the receive exactly a 4% or 9% credit rate. Buildings placed in service after 1987 were to receive the
credit rate that delivered the 30% and 70% subsidies as determined by Treasury’s formula. The credit rate that delivered the 30% and 70% subsidies as determined by Treasury’s formula. The
rehabilitationrehabilitation credit rate has been below 4% every month since January 1988.6 The Taxpayer credit rate has been below 4% every month since January 1988.6 The Taxpayer
Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated
Appropriations Act, 2021 (P.L. 116-260), sets a minimum credit (or “floor”) of 4% for the Appropriations Act, 2021 (P.L. 116-260), sets a minimum credit (or “floor”) of 4% for the
housing tax credit housing tax credit typical ytypically used for the rehabilitation of affordable housing. In other words, the used for the rehabilitation of affordable housing. In other words, the
effective rehabilitation credit rate cannot effective rehabilitation credit rate cannot fal fall below 4%. This change applies to buildings placed below 4%. This change applies to buildings placed
in service starting in 2021 and is permanent. in service starting in 2021 and is permanent.
The new construction credit rate had similarly been below its nominal 9% rate every month since The new construction credit rate had similarly been below its nominal 9% rate every month since
January 1991 until the Housing and Economic Recovery Act of 2008 (HERA; P.L. 110-289) set a January 1991 until the Housing and Economic Recovery Act of 2008 (HERA; P.L. 110-289) set a
temporary minimum credit of 9% for the new construction credit. The minimum credit applied to temporary minimum credit of 9% for the new construction credit. The minimum credit applied to
developments completed in August 2008 through the end of 2013.7 Following a number of developments completed in August 2008 through the end of 2013.7 Following a number of
temporary extensions, the floor became a permanent feature of the program in 2015 with temporary extensions, the floor became a permanent feature of the program in 2015 with
enactment of the Protecting Americans from Tax Hikes (PATH) Act (Division Q of P.L. 114-enactment of the Protecting Americans from Tax Hikes (PATH) Act (Division Q of P.L. 114-
113).8

5 T he113).8 5 The choice of interest rate will affect the credit rate that is needed to deliver the specified subsidy choice of interest rate will affect the credit rate that is needed to deliver the specified subsidy levels. IRC §42(b) levels. IRC §42(b)
requiresrequires that the Department of the that the Department of the T reasuryTreasury use an interest rate equal to 72% of the average of the mid-term applicable use an interest rate equal to 72% of the average of the mid-term applicable
federal rate and the long-term applicable federal rate. federal rate and the long-term applicable federal rate. T heThe mid- and long-term applicable federal rates are, in turn, mid- and long-term applicable federal rates are, in turn,
basedbased on the yieldson the yields on U.S.on U.S. T reasury Treasury securities. It could be argued securities. It could be argued that this interest rate, also known as the discount that this interest rate, also known as the discount
rate, should berate, should be higher becausehigher because LIHT C LIHTC investments are riskier investments are riskier th an T reasurythan Treasury securities. If this were true, then the securities. If this were true, then the
LIHT CLIHTC credit rate determined using credit rate determined using the interest rate specified in IRC §42(b) wouldthe interest rate specified in IRC §42(b) would result in subsidiesresult in subsidies less than the 30% less than the 30%
and 70%. Becauseand 70%. Because Congress definedCongress defined the subsidythe subsidy levels to be 30% and 70% usinglevels to be 30% and 70% using the in terest the interest rate specified in IRC rate specified in IRC
§42(b), this report does not consider how the use of alternative discount rates would§42(b), this report does not consider how the use of alternative discount rates would affect the program. affect the program.
6 The6 T he 4% credit rate was 4% credit rate was 4% during4% during the first year of the program. Since then the rate needed to produce the 30% the first year of the program. Since then the rate needed to produce the 30%
subsidysubsidy has been belowhas been below 4%. Novogradac & Company LLP, 4%. Novogradac & Company LLP, Low-Incom eIncome Housing Tax Credit Handbook, 2006 ed. , 2006 ed.
((T homsonThomson West, 2006), pp. 845-850; Novogradac & Company LLP, “ West, 2006), pp. 845-850; Novogradac & Company LLP, “ Tax Credit Percentages Tax Credit Percentages 20212022,” ,”
https://www.novoco.com/resource-centers/affordable-housing-tax-credits/tax-credit-percentages-https://www.novoco.com/resource-centers/affordable-housing-tax-credits/tax-credit-percentages-20212022. .
7 7 T heThe floor technically applied to properties that were “placed in service” during floor technically applied to properties that were “placed in service” during that time period. that time period.
8 8 T heThe floor was originally enacted on a temporary basis by the Housing floor was originally enacted on a temporary basis by the Housing and Economic Recovery Act of 2008 (P.L. 110-and Economic Recovery Act of 2008 (P.L. 110-
289) and applied only to new construction placed in service before December 31, 2013. 289) and applied only to new construction placed in service before December 31, 2013. T he American T axpayerThe American Taxpayer Relief Relief
Act of 2012 (P.L. 112-240) extended the 9% floor for credit allocations made before January 1, 2014. Act of 2012 (P.L. 112-240) extended the 9% floor for credit allocations made before January 1, 2014. T he T axThe Tax Increase Increase
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The effects of the minimum credits depend on how far the tax credit rates determined by Treasury The effects of the minimum credits depend on how far the tax credit rates determined by Treasury
are from 4% and 9%. The minimum credits have no effect if the credit rates produced by are from 4% and 9%. The minimum credits have no effect if the credit rates produced by
Treasury’s formula are at least 4% and 9%; the credit rates Treasury’s formula are at least 4% and 9%; the credit rates wil will be determined by Treasury’s be determined by Treasury’s
formula and generate subsidies of up to 30% and 70%, respectively. If, however, the credit rates formula and generate subsidies of up to 30% and 70%, respectively. If, however, the credit rates
determined by Treasury are below the floors, then the credit rates are set equal to either 4% or determined by Treasury are below the floors, then the credit rates are set equal to either 4% or
9%. When this happens, new construction projects can 9%. When this happens, new construction projects can potential ypotentially receive a subsidy above 70%, receive a subsidy above 70%,
with the subsidy increasing the farther the credit rate determined by Treasury’s formula is below with the subsidy increasing the farther the credit rate determined by Treasury’s formula is below
9%.9 Similarly, rehabilitation9%.9 Similarly, rehabilitation projects can projects can potential ypotentially receive a subsidy above 30%. The current receive a subsidy above 30%. The current
interest rate is the key factor determining whether the floors take effect. Treasury’s formula interest rate is the key factor determining whether the floors take effect. Treasury’s formula
produces low credit rates when interest rates are low and higher credit rates when interest rates produces low credit rates when interest rates are low and higher credit rates when interest rates
are high.10 In December 1990, when Treasury’s formula last determined a credit rate above 9% are high.10 In December 1990, when Treasury’s formula last determined a credit rate above 9%
(9.06%), the 10-year Treasury constant maturity rate was 8.08%.11 In (9.06%), the 10-year Treasury constant maturity rate was 8.08%.11 In January 2021mid-June 2022, the rate was , the rate was
around around 13.25%.12 Thus, interest rates would need to increase significantly from current levels for the %.12 Thus, interest rates would need to increase significantly from current levels for the
floor to no longer have an effect.floor to no longer have an effect.
An Example
A simplified example may help in understanding how the LIHTC program is intended to support A simplified example may help in understanding how the LIHTC program is intended to support
affordable housing development. Consider a new apartment complex with a qualified basis of $1 affordable housing development. Consider a new apartment complex with a qualified basis of $1
mil ion. million. Since the project involves new construction it Since the project involves new construction it wil will qualify for the 9% credit and, qualify for the 9% credit and,
assuming for the purposes of this example that the credit rate is exactly 9%, assuming for the purposes of this example that the credit rate is exactly 9%, wil will generate a generate a
stream of tax credits equal to $90,000 (9% × $1 stream of tax credits equal to $90,000 (9% × $1 mil ionmillion) per year for 10 years, or $900,000 in ) per year for 10 years, or $900,000 in
total. Under the appropriate interest ratetotal. Under the appropriate interest rate, the present value of the $900,000 stream of tax credits the present value of the $900,000 stream of tax credits
should be equal to $700,000, resulting in a 70% subsidy. Because the subsidy reduces the debt should be equal to $700,000, resulting in a 70% subsidy. Because the subsidy reduces the debt
needed to construct the property, the rent levels required to make the property needed to construct the property, the rent levels required to make the property financial yfinancially viable viable
are lower than they otherwise would be. Thus, the subsidy is intended to incentivize the are lower than they otherwise would be. Thus, the subsidy is intended to incentivize the
development of housing at lower rent levels—and development of housing at lower rent levels—and thustherefore affordable to lower-income families—that affordable to lower-income families—that
otherwise may not be otherwise may not be financial yfinancially feasible or attractive relative to alternative investments. feasible or attractive relative to alternative investments.
The situation would be similar if the project involved rehabilitated construction except the The situation would be similar if the project involved rehabilitated construction except the
developer would be entitled to a stream of tax credits equal to $40,000 (4% × $1 developer would be entitled to a stream of tax credits equal to $40,000 (4% × $1 mil ionmillion) per year ) per year
for 10 years, or $400,000 in total. The present value of the $400,000 stream of tax credits should for 10 years, or $400,000 in total. The present value of the $400,000 stream of tax credits should
be equal to $300,000, resulting in a 30% subsidy. be equal to $300,000, resulting in a 30% subsidy.

Prevention Act of 2014 (P.L. 113-295) retroactively extended the 9% floor through the end of 2014Prevention Act of 2014 (P.L. 113-295) retroactively extended the 9% floor through the end of 2014 . Division Q of P.L. . Division Q of P.L.
114-113—the Protecting Americans from 114-113—the Protecting Americans from T axTax Hikes Act (or “ Hikes Act (or “ PATH” Act) permanently extended the 9% floor. PATH” Act) permanently extended the 9% floor.
9 9 T reasuryTreasury’s formula is designed’s formula is designed to produce credit rates necessary to deliver either a 30% or 70% subsidy.to produce credit rates necessary to deliver either a 30% or 70% subsidy. T hese These credit credit
rates can be,rates can be, and often are, less than 4% and 9%. For example, the and often are, less than 4% and 9%. For example, the January 2021June 2022 tax credit rate, as determined by tax credit rate, as determined by
T reasuryTreasury’s formula, for rehabilitation construction was 3.’s formula, for rehabilitation construction was 3.0930% and the rate for new construction was 7.% and the rate for new construction was 7.2170%. In this case %. In this case
the 4% and 9% minimum credit rates take effect and the tax credit rates are set to exactly 4% and 9%, respectively. the 4% and 9% minimum credit rates take effect and the tax credit rates are set to exactly 4% and 9%, respectively.
BecauseBecause these credit rates are above what is neededthese credit rates are above what is needed to deliver a 30% subsidyto deliver a 30% subsidy (3.09 (3.30%) and 70% subsidy%) and 70% subsidy (i.e., 7.21 (7.70%), it %), it
means that the subsidiesmeans that the subsidies rise above 30% and 70% when the floors takes effect. rise above 30% and 70% when the floors takes effect.
10 This10 T his relationship is an intrinsic feature of the present value formula, and relationship is an intrinsic feature of the present value formula, and not a result of a decisionnot a result of a decision by T reasury by Treasury in in
computing the credit rate. computing the credit rate.
11 Board of Governors of the Federal Reserve System (US), 10 11 Board of Governors of the Federal Reserve System (US), 10 -Year -Year T reasuryTreasury Constant Maturity Rate [DGS10], Constant Maturity Rate [DGS10],
retrieved from FRED, Federal Reserve Bank of St. Louis, retrieved from FRED, Federal Reserve Bank of St. Louis, January 8, 2020June 22, 2022, https://fred.stlouisfed.org/series/DGS10. , https://fred.stlouisfed.org/series/DGS10.
12 12 T reasuryTreasury does not directly use the interest rate on 10-year bonds, but as discussed does not directly use the interest rate on 10-year bonds, but as discussed in footnote 5, in footnote 5, the interest rate used the interest rate used
by by T reasuryTreasury is based is based on the yields on U.S.on the yields on U.S. T reasury Treasury securities. securities.
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An Introduction to the Low-Income Housing Tax Credit

The Allocation Process
The process of The process of al ocatingallocating, awarding, and then claiming the LIHTC is complex and lengthy. The , awarding, and then claiming the LIHTC is complex and lengthy. The
process begins at the federal level with each state receiving an annual LIHTC process begins at the federal level with each state receiving an annual LIHTC al ocationallocation in in
accordance with federal law. The administration of the tax credit program is accordance with federal law. The administration of the tax credit program is typical ytypically carried out carried out
by each state’s housing finance agency (HFA). State HFAs by each state’s housing finance agency (HFA). State HFAs al ocateallocate credits to developers of rental credits to developers of rental
housing according to housing according to federal yfederally required, but state-created, required, but state-created, al ocationallocation plans. The process plans. The process typical y
typically ends with developers ends with developers sel ingselling awarded credits to outside investors in exchange for equity. A more awarded credits to outside investors in exchange for equity. A more
detailed discussion of each level of the detailed discussion of each level of the al ocationallocation process is presented below. process is presented below.
Federal Allocation to States
LIHTCs are first LIHTCs are first al ocatedallocated to each state according to its population. In to each state according to its population. In 20212022, states , states wil receive receive
LIHTC LIHTC al ocationallocation authority equal to $2. authority equal to $2.812560 per person, with a minimum per person, with a minimum smal small population state population state
al ocation of $3,245,625.13 These figures reflect a temporary increase in the amount of credits
each state received as a result of the 2018 Consolidated Appropriations Act (P.L. 115-141). The
increase is equal to 12.5% above what states would have received absent P.L. 115-141, and is in
effect through 2021. The state al ocationallocation of $2,975,000.13 The state allocation limits do not apply to the 4% credits limits do not apply to the 4% credits, which are
automatical y that are automatically packaged with tax-exempt bond financed projects.14 packaged with tax-exempt bond financed projects.14
State Allocation to Developers
State HFAs State HFAs al ocateallocate credits to developers of eligible credits to developers of eligible rental housing according to rental housing according to federal yfederally
required, but state-created, qualified required, but state-created, qualified al ocationallocation plans (QAPs). Federal law requires that a QAP plans (QAPs). Federal law requires that a QAP
give priority to projects that serve the lowest-income households and that remain affordable for give priority to projects that serve the lowest-income households and that remain affordable for
the longest period of time. States have flexibilitythe longest period of time. States have flexibility in developing their QAPs to set their own in developing their QAPs to set their own
allocation priorities (e.g., assisting certain subpopulations or geographic areas), and to place allocation priorities (e.g., assisting certain subpopulations or geographic areas), and to place
additional requirements on awardees (e.g., longer affordability periods, deeper income targeting). additional requirements on awardees (e.g., longer affordability periods, deeper income targeting).
QAPs are developed and revised via a public process, QAPs are developed and revised via a public process, al owingallowing for input from the general public for input from the general public
and local communities, as and local communities, as wel well as LIHTC stakeholders. Many states have two as LIHTC stakeholders. Many states have two al ocationallocation periods periods
per year. Developers apply for the credits by per year. Developers apply for the credits by proposing plans to state agencies.
An al ocation to a developer does not imply that al al ocated tax credits wil be claimed. An
al ocation simply means tax credits are set aside for a developer. Once a developer receives an
al ocation it general ysubmitting an application to state agencies. Once a developer receives an allocation it generally has two years to complete its project.15 Credits may not be claimed until a has two years to complete its project.15 Credits may not be claimed until a
property is placed in service. Tax credits that are not property is placed in service. Tax credits that are not al ocated allocated by states after two years are added by states after two years are added
to a national pool and then redistributed to states that apply for the excess credits. To be eligible to a national pool and then redistributed to states that apply for the excess credits. To be eligible
for an excess credit for an excess credit al ocationallocation, a state must have , a state must have al ocatedallocated its its entire previous allotment of tax credits. This use-or-lose feature gives states an incentive to allocate all of their tax credits to developers. To be eligible for an LIHTC allocation, properties are required to meet certain tests that restrict both the amount of rent that may be charged and the income of eligible tenants. Historically, the “income test” for a qualified low-income housing project has required project owners to irrevocably elect one of two income-level tests, either a 20-50 test or a 40-60 test. To satisfy the entire previous al otment of tax

13 Internal Revenue Service, 13 Internal Revenue Service, Revenue Procedure 20202021-45, https://www.irs.gov/pub/irs-drop/rp-, https://www.irs.gov/pub/irs-drop/rp-2021-45.pdf. From 1986 -45.pdf. From 1986
through 2000, the initial credit allocation amount was $1.25 per capita. through 2000, the initial credit allocation amount was $1.25 per capita. T heThe allocation was increased to $1.50 in 2001, allocation was increased to $1.50 in 2001,
to $1.75 in 2002 and 2003, and indexed for inflation annually thereafter. The initial minimum tax credit ceiling for to $1.75 in 2002 and 2003, and indexed for inflation annually thereafter. The initial minimum tax credit ceiling for
small states wassmall states was $2,000,000 $2 million, and was indexed for inflation annually after 2003. , and was indexed for inflation annually after 2003.
14 Tax14 T ax-exempt bonds are issued-exempt bonds are issued subject subject to a private activity bond volume limit per state. For more information, seeto a private activity bond volume limit per state. For more information, see
CRSCRS Report RL31457, Report RL31457, Private Activity Bonds: An Introduction , by Steven Maguire and Joseph S. Hughes.
, by Grant A. Driessen. 15 Developers must have the property placed in service in the calendar year an allocation is made. However, a 15 Developers must have the property placed in service in the calendar year an allocation is made. However, a
developer can receive an extension which gives them an additional calendar year to have the property placed in developer can receive an extension which gives them an additional calendar year to have the property placed in se rvice.
T oservice. To be granted this extension, known as a be granted this extension, known as a carryover allocation, at least 10% of anticipated costs must be, at least 10% of anticipated costs must be incurred within incurred within
the first calendar year. the first calendar year.
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credits. This use-or-lose feature gives states an incentive to al ocate al of their tax credits to
developers.
To be eligible for an LIHTC al ocation, properties are required to meet certain tests that restrict
both the amount of rent that may be charged and the income of eligible tenants. Historical y, the
“income test” for a qualified low-income housing project has required project owners to
irrevocably elect one of two income-level tests, either a 20-50 test or a 40-60 test. To satisfy the
first test, at least 20% of the units must be occupied by individuals with income of 50% or less of first test, at least 20% of the units must be occupied by individuals with income of 50% or less of
the area’s median gross income (AMI), adjusted for family size. To satisfy the second test, at least the area’s median gross income (AMI), adjusted for family size. To satisfy the second test, at least
40% of the units must be occupied by individuals with income of 60% or less of AMI, adjusted 40% of the units must be occupied by individuals with income of 60% or less of AMI, adjusted
for family size.16for family size.16
The 2018 Consolidated Appropriations Act (P.L. 115-141) added a third income test option that The 2018 Consolidated Appropriations Act (P.L. 115-141) added a third income test option that
al owsallows owners to average the income of tenants. owners to average the income of tenants. Specifical ySpecifically, under the income averaging option, , under the income averaging option,
the income test is satisfied if at least 40% of the units are occupied by tenants with an average the income test is satisfied if at least 40% of the units are occupied by tenants with an average
income of no greater than 60% of AMI, and no individualincome of no greater than 60% of AMI, and no individual tenant has an income exceeding 80% of tenant has an income exceeding 80% of
AMI. Thus, for example, renting to someone with an income equal to 80% of AMI would also AMI. Thus, for example, renting to someone with an income equal to 80% of AMI would also
require renting to someone with an income no greater than 40% of AMI, so the tenants would require renting to someone with an income no greater than 40% of AMI, so the tenants would
have an average income equal to 60% of AMI. have an average income equal to 60% of AMI.
In addition to the income test, a qualified low-income housing project must also meet the “gross In addition to the income test, a qualified low-income housing project must also meet the “gross
rents test” by ensuring rents (adjusted for bedroom size) do not exceed 30% of the 50% or 60% of rents test” by ensuring rents (adjusted for bedroom size) do not exceed 30% of the 50% or 60% of
AMI, depending on which income test option the project elected.17 AMI, depending on which income test option the project elected.17
The types of projects eligible for the LIHTC include rental housing located in multifamily The types of projects eligible for the LIHTC include rental housing located in multifamily
buildings, single-family buildings, single-family dwel ingsdwellings, duplexes, and townhouses. Projects may include more than , duplexes, and townhouses. Projects may include more than
one building. Tax credit project types also vary by the type of tenants served; for example, one building. Tax credit project types also vary by the type of tenants served; for example,
LIHTC properties may be designated as housing persons who are elderly or have disabilities.LIHTC properties may be designated as housing persons who are elderly or have disabilities.
Properties located in difficult development areas (DDAs) or qualified census tracts (QCTs) are Properties located in difficult development areas (DDAs) or qualified census tracts (QCTs) are
eligibleeligible to receive a “basis boost” as an incentive for developers to invest in more distressed to receive a “basis boost” as an incentive for developers to invest in more distressed
areas. In these areas, the LIHTC can be claimed for 130% (instead of the normal 100%) of the areas. In these areas, the LIHTC can be claimed for 130% (instead of the normal 100%) of the
project’s eligible basis. This also means that available credits can be increased by up to 30%. project’s eligible basis. This also means that available credits can be increased by up to 30%.
HERAHERA (P.L. 110-289) enacted changes that (P.L. 110-289) enacted changes that al owallow an HFA to classify any LIHTC project that is an HFA to classify any LIHTC project that is
not financed with tax-exempt bonds as difficult to develop, and hence, eligible for a basis boost.not financed with tax-exempt bonds as difficult to develop, and hence, eligible for a basis boost.
Developers and Investors
Upon receipt of an LIHTC award, developers Upon receipt of an LIHTC award, developers typical ytypically exchange or “ exchange or “sel sell” the tax credits for ” the tax credits for
equity investment in the real estate project. The “sale” of credits occurs within a partnership that equity investment in the real estate project. The “sale” of credits occurs within a partnership that
legal y legally binds the two parties to satisfy federal tax requirements that the tax credit claimant have binds the two parties to satisfy federal tax requirements that the tax credit claimant have
an ownership interest in the underlying property. This makes the trading of tax credits different an ownership interest in the underlying property. This makes the trading of tax credits different
than the trading of corporate stock, which occurs between two unrelated parties on an exchange. than the trading of corporate stock, which occurs between two unrelated parties on an exchange.
The partnership form also The partnership form also al owsallows income (or losses), deductions, and other tax items to be income (or losses), deductions, and other tax items to be
al ocatedallocated directly to the individual directly to the individual partners.18 The sale is usually structured using a limited partnership between the developer and the investor, and sometimes administered by syndicators. As the general partner, the developer has a relatively small ownership percentage but maintains the authority to build and run the project on a day-to-day basis. The investor, as a limited partner, has a large ownership percentage with an otherwise passive role. Syndicators charge a fee for overseeing the investment transactions. 16 Individual partners.18

16 Individual income levels are certified by each property manager, although states have some income levels are certified by each property manager, although states have some discretio ndiscretion over the over the
specifics of the income verification method. LIHTC participants are prohibited from using HUD’s Enterprise Income specifics of the income verification method. LIHTC participants are prohibited from using HUD’s Enterprise Income
Verification (EIV) system to verify tenant income. The EIV system is requiredVerification (EIV) system to verify tenant income. The EIV system is required to be usedto be used in the Section 8 housing in the Section 8 housing
voucher program. voucher program.
17 Rent includes 17 Rent includes utility costs. utility costs.
18 For more details on the general tax equity mechanism, see CRS18 For more details on the general tax equity mechanism, see CRS Report R45693, Report R45693, Tax Equity Financing: An
Introduction and Policy Considerations, by Mark P. Keightley, Donald J. Marples, and Molly F. Sherlock. , by Mark P. Keightley, Donald J. Marples, and Molly F. Sherlock.
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The sale is usual y structured using a limited partnership between the developer and the investor,
and sometimes administered by syndicators. As the general partner, the developer has a relatively
smal ownership percentage but maintains the authority to build and run the project on a day-to-
day basis. The investor, as a limited partner, has a large ownership percentage with an otherwise
passive role. Syndicators charge a fee for overseeing the investment transactions.
Typical yTypically, investors do not expect their equity investment in a project to produce income. Instead, , investors do not expect their equity investment in a project to produce income. Instead,
investors look to the credits, which investors look to the credits, which wil will be used to offset their income tax liabilities,be used to offset their income tax liabilities, as their as their
return on investment. The return investors receive is determined in part by the market price of the return on investment. The return investors receive is determined in part by the market price of the
tax credits. The market price of tax credits fluctuates, but in normal economic conditions the price tax credits. The market price of tax credits fluctuates, but in normal economic conditions the price
typical ytypically ranges from the mid-$0.80s to low-$0.90s per $1.00 tax credit. The larger the difference ranges from the mid-$0.80s to low-$0.90s per $1.00 tax credit. The larger the difference
between the market price of the credits and their face value ($1.00), the larger the return to between the market price of the credits and their face value ($1.00), the larger the return to
investors. Investors also often receive tax benefits related to any tax losses generated through the investors. Investors also often receive tax benefits related to any tax losses generated through the
project’s operating costs, interest on its debt, and deductions such as depreciation. The right to project’s operating costs, interest on its debt, and deductions such as depreciation. The right to
claim tax benefits in addition to the tax credits claim tax benefits in addition to the tax credits wil will affect the price investors are affect the price investors are wil ingwilling to pay. to pay.
The vast majority of investors are corporations, either investing directly or through private The vast majority of investors are corporations, either investing directly or through private
partnerships. Financial partnerships. Financial firms are large investors in LIHTC.institutions and banks are responsible for the majority of investment in LIHTC.19 Partly this is due to the Community Partly this is due to the Community
Reinvestment Act (CRA), which considers LIHTC investments favorably.Reinvestment Act (CRA), which considers LIHTC investments favorably.1920 Other investors Other investors
include real estate, insurance, utility, and manufacturing firms, which are seeking a return in the include real estate, insurance, utility, and manufacturing firms, which are seeking a return in the
form of reduced taxes from investing in the tax credits. form of reduced taxes from investing in the tax credits.
The LIHTC finances part of the total cost of many projects rather than the full cost and, as a The LIHTC finances part of the total cost of many projects rather than the full cost and, as a
result, must be combined with other resources. The financial resources that may be used in result, must be combined with other resources. The financial resources that may be used in
conjunction with the LIHTC include conventional mortgage loans provided by private lenders conjunction with the LIHTC include conventional mortgage loans provided by private lenders
and alternative financing and grants from public or private sources. Individual states provide and alternative financing and grants from public or private sources. Individual states provide
financing as financing as wel well, some of which may be in the form of state tax credits modeled after the federal , some of which may be in the form of state tax credits modeled after the federal
provision. provision. Additional y, Additionally, some LIHTC projects may have tenants who receive other government some LIHTC projects may have tenants who receive other government
subsidies such as housing vouchers.
Recent Legislative Developments
Most recently, the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division
EE of the Consolidated Appropriations Act, 2021 (P.L. 116-260), sets a minimum credit (or
“floor”) of 4% for the housing tax credit typical y used for the rehabilitation of affordable
housing. The Joint Committee on Taxation estimates this change wil reduce federal revenues by
$5.8 bil ion between FY2021 and FY2030.20 This change is permanent.
Division EE of P.L. 116-260 also increased, for calendar years 2021 and 2022, the credit
al ocation authority for buildings located in any qualified disaster zone, defined as that portion of
any qualified disaster area which was determined by the President during the period beginning on
January 1, 2020, and ending on the date which is 60 days from enactment of P.L. 116-260. For
2021 the increase is equal to the lesser of $3.50 multiplied by the population residing in a
qualified disaster zone, and 65% of the state’s overal credit al ocation authority for calendar year
2020. For 2022, the increase is equal to any unused increased credit al ocation authority from
2021 (i.e., 2021 increased credit al ocation authority may be carried over to 2022). Buildings

19 For more information on the LIHTC program and the CRA, see Office of the Comptroller of the Currency, Low-
Incom e Housing Tax Credits: Affordable Housing Investm entsubsidies such as housing vouchers. Recent Legislative Developments In May 2022, the Biden Administration released a plan to address rising housing costs by encouraging an expansion of the housing supply. The plan calls for adopting proposed expansions of the LIHTC program that were included in various iterations of the Build Back Better Act (BBBA; H.R. 5376), and adopting a modification in the President’s FY2023 Budget proposal that would allow for an increased LIHTC subsidy for certain developments financed with tax-exempt bonds. The most recent version of the BBBA, released by the Senate Finance Committee on December 11, 2021, includes six proposed modifications to the LIHTC program, most notably an increase in the allocation authority of states that would eventually reach $3.86 per person in 2025. The changes proposed by the BBBA are summarized in Parts 1 and 3 of Table 1 in CRS Report R46998, Senate Finance Committee Tax Provisions in the Build Back Better Act, coordinated by Molly F. Sherlock. A number of the proposals in the BBBA and the modification in the President’s FY2023 Budget proposal are similar or related to proposals contained in the Affordable Housing Credit Improvement Act of 2021 (S. 1136/H.R. 2573). The Affordable Housing Credit Improvement Act of 2021 includes a broader set of changes to the LIHTC program. A previous version of that bill was introduced in the 116th Congress. The most recent legislative changes to the LIHTC program were included in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021 (P.L. 116-260), and set a minimum credit (or “floor”) of 4% for the 19 For more information on the LIHTC investor landscape, see CohnReznick, LLP, Housing Tax Credits Investments: Investment and Operational Performance, November 18, 2019. 20 For more information on the LIHTC program and the CRA, see Office of the Comptroller of the Currency, Low-Income Housing Tax Credits: Affordable Housing Investment Opportunities for Banks, Washington, DC, April 2014, http://www.occ.gov/topics/community-affairs/publications/insights/insights-low-income-housing-tax-credits.pdf. Congressional Research Service 6 An Introduction to the Low-Income Housing Tax Credit housing tax credit typically used for the rehabilitation of affordable housing. The Joint Committee on Taxation estimates this change will Opportunities for Banks, Washington, DC, April 2014,
http://www.occ.gov/topics/community-affairs/publications/insights/insights-low-income-housing-tax-credits.pdf.
20 Joint Committee on T axation, Estimated Budget Effects of the Revenue Provisions Contained in Rules Committee
Print 116-68, the “Consolidated Appropriations Act, 2021,” JCX-24-20, December 21, 2020.
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impacted by this provision wil also be granted a one-year extension of the placed in service
deadline and the so-cal ed 10% test. The JCT estimates these changes wil reduce federal
reduce federal revenues by $revenues by $887 mil ion 5.8 billion between FY2021 between FY2021 and FY2030.21 This change is permanent. Division EE of P.L. 116-260 also increased, for calendar years 2021 and 2022, the credit allocation authority for buildings located in any qualified disaster zone, defined as that portion of any qualified disaster area which was determined by the President during the period beginning on January 1, 2020, and ending on the date which is 60 days from enactment of P.L. 116-260. For 2021, the increase was equal to the lesser of $3.50 multiplied by the population residing in a qualified disaster zone, and 65% of the state’s overall credit allocation authority for calendar year 2020. For 2022, the increase is equal to any unused increased credit allocation authority from 2021 (i.e., 2021 increased credit allocation authority may be carried over to 2022). Buildings impacted by this provision will also be granted a one-year extension of the placed in service deadline and the so-called 10% test. The JCT estimates these changes will reduce federal revenues by $887 million between FY2021 and FY2030. and FY2030.
To assist certain areas of California that were affected by natural disasters in 2017 and 2018, the
Further Consolidated Appropriations Act, 2020 (P.L. 116-94) increased California’s 2020 LIHTC
al ocation by the lesser of (1) the state’s 2020 LIHTC al ocations to buildings located in qualified
2017 and 2018 California disaster areas, or (2) 50% of the state’s combined 2017 and 2018 total
LIHTC al ocations.

Author Information

Mark P. Keightley Mark P. Keightley

Specialist in Economics Specialist in Economics



Disclaimer
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21 Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in Rules Committee Print 116-68, the “Consolidated Appropriations Act, 2021,” JCX-24-20, December 21, 2020. Congressional Research Service Congressional Research Service
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