An Introduction to the Low-Income Housing Tax Credit

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An Introduction to the Low-Income Housing
~~June 23, 2022~~January 6, 2023
Tax Credit
Mark P. Keightley
The low-income housing tax credit (LIHTC) program is the federal government’s primary policy The low-income housing tax credit (LIHTC) program is 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 for lower-income agreeing to reserve a certain fraction of units that are rent-restricted 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 (mostly financial institutions) in exchange complete construction so they will usually sell their tax credits to outside investors (mostly financial institutions) in exchange
for equity financing. The equity reduces the financing developers would otherwise have to secure and allows tax credit 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 federal government an average of approximately properties to offer more affordable rents. The LIHTC is estimated to cost the federal government an average of approximately
$10.9 billion annually. $10.9 billion annually.
~~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 most recent legislative changes that affected the LIHTC program 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~~were included in the law commonly known as the Inflation Reduction Act of 2022 (P.L. 117-169; IRA). The changes allow developers that combine LIHTC with either the Section 48 energy investment tax credit or the Section 45L new energy efficient homes credit to realize the full benefits of those credits without reducing LIHTC amounts. Prior to that, the most recent legislative changes to the LIHTC program were included in the Taxpayer Certainty and Disaster Tax Relief 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 (~~Act of 2020 (Division EE of P.L. 116-260), which set a P.L. 116-260), which set a permanent minimum minimum
credit (or “floor”) of 4% for the housing tax credit 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 revenues by $5.8 billion between FY2021 and~~
~~FY2030. This change is permanent.~~
~~Division EE of P.L. 116-260~~ that is typically combined with tax-exempt bond financing and used for the rehabilitation of affordable housing. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 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 located in any qualified disaster zone~~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 . 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 zone, and 65% of the state’s overall credit allocation authority for calendar year 2020. For 2022, the increase iswas equal to any equal to any
unused increased credit allocation authority from 2021unused increased credit allocation authority from 2021 ~~(i.e., 2021 increased credit allocation authority may be carried over to~~
~~2022)~~. Buildings impacted by this provision . Buildings impacted by this provision ~~will~~were also also be granted a one-year extension of the placedgranted a one-year extension of the placed in -in-service deadline and service deadline and
~~the so-called 10% test. The JCT estimates these changes will reduce federal revenues by $887 million between FY2021 and~~
~~FY2030.~~
the so-called 10% test. In the 117th Congress, there were a number of legislative proposals that would have modified and expanded the LIHTC program, most notably the Affordable Housing Credit Improvement Act of 2021 (S. 1136/H.R. 2573) and the various iterations of the Build Back Better Act (BBBA). The Affordable Housing Credit Improvement Act of 2021 formed the bases for most of the proposals in the BBBA, but included a broader set of changes to the LIHTC program. Neither act was enacted into law. A previous version of the Affordable Housing Credit Improvement Act was introduced in the 116th Congress.
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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 available to be rented. Due to the need for upfront financing to means it is completed and available to be rented. Due to the need for upfront financing to
complete construction, developers typically sell the 10-year stream of tax credits to outside complete construction, developers typically sell the 10-year stream of tax credits to outside
investors (mostly financial institutions) in exchange for equity financing. The equity that is raised investors (mostly 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. With lower reduces the amount of debt and other funding that would otherwise be required. With lower
financing costs, it becomes financially feasible for tax credit properties to charge lower rents, and financing costs, it becomes financially feasible for tax credit properties to charge lower rents, and
thus, potentially expand the supply of affordable rental housing. The LIHTC program is estimated thus, potentially expand the supply of affordable rental housing. The LIHTC program is estimated
to cost the government an average of $to cost the government an average of $~~10.9~~13.5 billion annually.1 billion annually.1
Types of Credits
There are two types of LIHTCs available to developers. The so-called 9% credit is generally There are two types of LIHTCs available to developers. The so-called 9% credit is generally
reserved for new construction and is intended to deliver up to a 70% subsidy. The so-called 4% reserved for new construction and is intended to deliver up to a 70% subsidy. The so-called 4%
credit is typically used for rehabilitation projects utilizing at least 50% in federally tax-exempt credit is typically used for rehabilitation projects utilizing at least 50% in federally tax-exempt
bond financing and is designed to deliver up to a 30% subsidy. This report will also refer to the bond financing and is designed to deliver up to a 30% subsidy. This report will 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 the average estimated tax expenditure associated with the program between FY2020 and FY2024. This~~
~~figure does not include revenue loss associated with the changes to the LIHTC program enacted by the Consolidated~~
~~Appropriations Act, 2021 (P.L. 116-260). These change are estimated to reduce federal revenues by $6.7 billion~~
~~between FY2021 and FY2030. U.S. Congress, Joint Committee on Taxation,~~ ~~Estimates of Federal Tax Expenditures~~
~~for Fiscal Years 2020-2024, JCX-23-20, November 5, 2020; and 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.~~
The U.S. Department of the Treasury uses a formula to determine the credit rates that will 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 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 1 Computed as the average estimated tax expenditure associated with the program between FY2022 and FY2026. U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2022-2026, JCX-22-22, December 22, 2022. 2 These labels represent generalizations about the use of the 4% and 9% credits and are a helpful way to think about the 2 These labels represent generalizations about the use of the 4% and 9% credits and are a helpful way to think about the
two different types of credits. The 9% credit is also commonly referred to as the “competitive credit” because awards of two different types of credits. The 9% credit is also commonly referred to as the “competitive credit” because awards of
9% credits are drawn from a state’s annual LIHTC allocation authority and developers must compete for an award. The 9% credits are drawn from a state’s annual LIHTC allocation authority and developers must compete for an award. The
4% credit is also commonly referred to as the “non-competitive credit” or “automatic credit” because developers do not 4% credit is 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 tax-exempt bond financing; they are have to compete for an award if at least 50% of the development is financed with tax-exempt bond financing; they are
automatically awarded 4% tax credits. These 4% tax credits are not drawn from a state’s annual LIHTC allocation automatically awarded 4% tax credits. These 4% tax credits are not drawn from a state’s annual LIHTC allocation
authority. authority.
3 The present value concept allows for the comparison of dollar amounts that are received at different points in time 3 The 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 because of the since, for example, a dollar received today has a different value than a dollar received in five years because 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. The present value calculation converts dollar amounts received at different points in time into a in different currencies. The 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 will~~
~~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~~
~~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~~
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 by the development’s qualified basis to Once the credit rate has been determined, it is multiplied by the development’s qualified basis to
obtain the amount of LIHTCs a project will receive each year for 10 years. The credit rate stays obtain the amount of LIHTCs a project will 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 rehabilitation and new construction tax credits have ordinarily not been 4% and 9%. The Tax The rehabilitation 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
rehabilitation credit rate has been below 4% every month since January 1988.6 The Taxpayer rehabilitation 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 typically used for the rehabilitation of affordable housing. In other words, the housing tax credit typically used for the rehabilitation of affordable housing. In other words, the
effective rehabilitation credit rate cannot fall below 4%. This change applies to buildings placed effective rehabilitation credit rate cannot fall 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).8 113).8
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 Treasury’s formula are at least 4% and 9%; the credit rates will be determined by Treasury’s
5 The choice of interest rate will affect the credit rate that is needed to deliver the specified subsidy levels. IRC §42(b) 5 The choice of interest rate will affect the credit rate that is needed to deliver the specified subsidy levels. IRC §42(b)
requires that the Department of the Treasury use an interest rate equal to 72% of the average of the mid-term applicable requires that the Department of the Treasury use an interest rate equal to 72% of the average of the mid-term applicable
federal rate and the long-term applicable federal rate. The mid- and long-term applicable federal rates are, in turn, federal rate and the long-term applicable federal rate. The mid- and long-term applicable federal rates are, in turn,
based on the yields on U.S. Treasury securities. It could be argued that this interest rate, also known as the discount based on the yields on U.S. Treasury securities. It could be argued that this interest rate, also known as the discount
rate, should be higher because LIHTC investments are riskier than Treasury securities. If this were true, then the rate, should be higher because LIHTC investments are riskier than Treasury securities. If this were true, then the
LIHTC credit rate determined using the interest rate specified in IRC §42(b) would result in subsidies less than the 30% LIHTC credit rate determined using the interest rate specified in IRC §42(b) would result in subsidies less than the 30%
and 70%. Because Congress defined the subsidy levels to be 30% and 70% using the interest rate specified in IRC and 70%. Because Congress defined the subsidy levels to be 30% and 70% using the interest rate specified in IRC
§42(b), this report does not consider how the use of alternative discount rates would affect the program. §42(b), this report does not consider how the use of alternative discount rates would affect the program.
6 The 4% credit rate was 4% during the first year of the program. Since then the rate needed to produce the 30% 6 The 4% credit rate was 4% during the first year of the program. Since then the rate needed to produce the 30%
subsidy has been below 4%. Novogradac & Company LLP, subsidy has been below 4%. Novogradac & Company LLP, Low-Income Housing Tax Credit Handbook, 2006 ed. , 2006 ed.
(Thomson West, 2006), pp. 845-850; Novogradac & Company LLP, “Tax Credit Percentages 2022,” (Thomson West, 2006), pp. 845-850; Novogradac & Company LLP, “Tax Credit Percentages 2022,”
https://www.novoco.com/resource-centers/affordable-housing-tax-credits/tax-credit-percentages-2022. https://www.novoco.com/resource-centers/affordable-housing-tax-credits/tax-credit-percentages-2022.
7 The floor technically applied to properties that were “placed in service” during that time period. 7 The floor technically applied to properties that were “placed in service” during that time period.
8 The floor was originally enacted on a temporary basis by the Housing and Economic Recovery Act of 2008 (P.L. 110-8 The floor was originally enacted on a temporary basis by the Housing and Economic Recovery Act of 2008 (P.L. 110-
289) and applied only to new construction placed in service before December 31, 2013. The American Taxpayer Relief 289) and applied only to new construction placed in service before December 31, 2013. The American Taxpayer Relief
Act of 2012 (P.L. 112-240) extended the 9% floor for credit allocations made before January 1, 2014. The Tax Increase Act of 2012 (P.L. 112-240) extended the 9% floor for credit allocations made before January 1, 2014. The Tax Increase
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~~link to page 5~~ ~~An Introduction to the Low-Income Housing Tax Credit~~

~~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~~
~~Treasury’s formula are at least 4% and 9%; the credit rates will be determined by Treasury’s~~
Prevention Act of 2014 (P.L. 113-295) retroactively extended the 9% floor through the end of 2014. Division Q of P.L. 114-113—the Protecting Americans from Tax Hikes Act (or “PATH” Act) permanently extended the 9% floor. Congressional Research Service 2 link to page 5 An Introduction to the Low-Income Housing Tax Credit 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 potentially receive a subsidy above 70%, 9%. When this happens, new construction projects can potentially 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, rehabilitation projects can potentially receive a subsidy above 30%. The current 9%.9 Similarly, rehabilitation projects can potentially 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 mid-June 2022, the rate was (9.06%), the 10-year Treasury constant maturity rate was 8.08%.11 In mid-June 2022, the rate was
around 3.25%.12 Thus, interest rates would need to increase significantly from current levels for around 3.25%.12 Thus, interest rates would need to increase significantly from current levels for
the floor to no longer have an effect. the 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
million. Since the project involves new construction it will qualify for the 9% credit and, million. Since the project involves new construction it will qualify for the 9% credit and,
assuming for the purposes of this example that the credit rate is exactly 9%, will generate a assuming for the purposes of this example that the credit rate is exactly 9%, will generate a
stream of tax credits equal to $90,000 (9% × $1 million) per year for 10 years, or $900,000 in stream of tax credits equal to $90,000 (9% × $1 million) per year for 10 years, or $900,000 in
total. Under the appropriate interest rate, the present value of the $900,000 stream of tax credits total. Under the appropriate interest rate, 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 financially viable needed to construct the property, the rent levels required to make the property financially 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 therefore affordable to lower-income development of housing at lower rent levels—and therefore affordable to lower-income
families—that otherwise may not be financially feasible or attractive relative to alternative families—that otherwise may not be financially feasible or attractive relative to alternative
investments. 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 million) per year developer would be entitled to a stream of tax credits equal to $40,000 (4% × $1 million) 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 2014. Division Q of P.L.~~
~~114-113—the Protecting Americans from Tax Hikes Act (or “PATH” Act) permanently extended the 9% floor.~~
The Allocation Process The process of allocating, awarding, and then claiming the LIHTC is complex and lengthy. The process begins at the federal level with each state receiving an annual LIHTC allocation in accordance with federal law. The administration of the tax credit program is typically carried out 9 Treasury’s formula is designed to produce credit rates necessary to deliver either a 30% or 70% subsidy. These credit 9 Treasury’s formula is designed to produce credit rates necessary to deliver either a 30% or 70% subsidy. These credit
rates can be, and often are, less than 4% and 9%. For example, the June 2022 tax credit rate, as determined by rates can be, and often are, less than 4% and 9%. For example, the June 2022 tax credit rate, as determined by
Treasury’s formula, for rehabilitation construction was 3.30% and the rate for new construction was 7.70%. In this case Treasury’s formula, for rehabilitation construction was 3.30% and the rate for new construction was 7.70%. 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.
Because these credit rates are above what is needed to deliver a 30% subsidy (3.30%) and 70% subsidy (7.70%), it Because these credit rates are above what is needed to deliver a 30% subsidy (3.30%) and 70% subsidy (7.70%), it
means that the subsidies rise above 30% and 70% when the floors takes effect. means that the subsidies rise above 30% and 70% when the floors takes effect.
10 This relationship is an intrinsic feature of the present value formula, and not a result of a decision by Treasury in 10 This relationship is an intrinsic feature of the present value formula, and not a result of a decision by Treasury in
computing the credit rate. computing the credit rate.
11 Board of Governors of the Federal Reserve System (US), 10-Year Treasury Constant Maturity Rate [DGS10], 11 Board of Governors of the Federal Reserve System (US), 10-Year Treasury Constant Maturity Rate [DGS10],
retrieved from FRED, Federal Reserve Bank of St. Louis, June 22, 2022, https://fred.stlouisfed.org/series/DGS10. retrieved from FRED, Federal Reserve Bank of St. Louis, June 22, 2022, https://fred.stlouisfed.org/series/DGS10.
12 Treasury does not directly use the interest rate on 10-year bonds, but as discussed in footno 12 Treasury does not directly use the interest rate on 10-year bonds, but as discussed in footnote 5, the interest rate used the interest rate used
by Treasury is based on the yields on U.S. Treasury securities. by Treasury is based on the yields on U.S. Treasury securities.
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An Introduction to the Low-Income Housing Tax Credit

~~The Allocation Process~~
~~The process of allocating, awarding, and then claiming the LIHTC is complex and lengthy. The~~
~~process begins at the federal level with each state receiving an annual LIHTC allocation in~~
~~accordance with federal law. The administration of the tax credit program is typically carried out~~
by each state’s housing finance agency (HFA). State HFAs allocate credits to developers of rental by each state’s housing finance agency (HFA). State HFAs allocate credits to developers of rental
housing according to federally required, but state-created, allocation plans. The process typically housing according to federally required, but state-created, allocation plans. The process typically
ends with developers selling awarded credits to outside investors in exchange for equity. A more ends with developers selling awarded credits to outside investors in exchange for equity. A more
detailed discussion of each level of the allocation process is presented below. detailed discussion of each level of the allocation process is presented below.
Federal Allocation to States
LIHTCs are first allocated to each state according to its population. In LIHTCs are first allocated to each state according to its population. In ~~2022~~2023, states , states ~~receive~~
have LIHTC allocation authority equal to $2.LIHTC allocation authority equal to $2.6075 per person, with a minimum small population state per person, with a minimum small population state
allocation allocation of $3,185~~of $2,975~~,000.13 The state allocation limits do not apply to the 4% credits that are ,000.13 The state allocation limits do not apply to the 4% credits that are
automatically packaged with tax-exempt bond financed projects.14 automatically packaged with tax-exempt bond financed projects.14
State Allocation to Developers
State HFAs allocate credits to developers of eligible rental housing according to federally State HFAs allocate credits to developers of eligible rental housing according to federally
required, but state-created, qualified allocation plans (QAPs). Federal law requires that a QAP required, but state-created, qualified allocation 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 flexibility in developing their QAPs to set their own the longest period of time. States have flexibility 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, allowing for input from the general public QAPs are developed and revised via a public process, allowing for input from the general public
and local communities, as well as LIHTC stakeholders. Many states have two allocation periods and local communities, as well as LIHTC stakeholders. Many states have two allocation periods
per year. Developers apply for the credits by submitting an application to state agencies. per year. Developers apply for the credits by submitting an application to state agencies.
Once a developer receives an allocation it generally has two years to complete its project.15 Once a developer receives an allocation it generally 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 allocated Credits may not be claimed until a property is placed in service. Tax credits that are not allocated
by states after two years are added to a national pool and then redistributed to states that apply for 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 for an excess credit allocation, a state must have allocated its the excess credits. To be eligible for an excess credit allocation, a state must have allocated its
entire previous allotment of tax credits. This use-or-lose feature gives states an incentive to entire previous allotment of tax credits. This use-or-lose feature gives states an incentive to
allocate all of their tax credits to developers. allocate all of their tax credits to developers.
To be eligible for an LIHTC allocation, properties are required to meet certain tests that restrict 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 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 “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 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 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 for family size.16
13 Internal Revenue Service, 13 Internal Revenue Service, Revenue Procedure ~~2021-45~~2022-38, https://www.irs.gov/pub/irs-drop/rp-, https://www.irs.gov/pub/irs-drop/rp-~~21-45~~22-38.pdf. From 1986 .pdf. From 1986
through 2000, the initial credit allocation amount was $1.25 per capita. The allocation was increased to $1.50 in 2001, through 2000, the initial credit allocation amount was $1.25 per capita. The 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 was $2 million, and was indexed for inflation annually after 2003. small states was $2 million, and was indexed for inflation annually after 2003.
14 Tax-exempt bonds are issued subject to a private activity bond volume limit per state. For more information, see 14 Tax-exempt bonds are issued subject to a private activity bond volume limit per state. For more information, see
CRS Report RL31457, CRS Report RL31457, Private Activity Bonds: An Introduction, by Grant A. Driessen. , 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 service. developer can receive an extension which gives them an additional calendar year to have the property placed in service.
To be granted this extension, known as a To be granted this extension, known as a carryover allocation, at least 10% of anticipated costs must be incurred within , at least 10% of anticipated costs must be incurred within
the first calendar year. the first calendar year.
16 Individual income levels are certified by each property manager, although states have some discretion over the Congressional Research Service Congressional Research Service

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~~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~~
~~40% of the units must be occupied by individuals with income of 60% or less of AMI, adjusted~~
~~for 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
allows owners to average the income of tenants. Specifically, under the income averaging option, allows owners to average the income of tenants. Specifically, 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 individual tenant has an income exceeding 80% of income of no greater than 60% of AMI, and no individual 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 dwellings, duplexes, and townhouses. Projects may include more than buildings, single-family dwellings, 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
eligible to receive a “basis boost” as an incentive for developers to invest in more distressed eligible 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%.
HERA (P.L. 110-289) enacted changes that allow an HFA to classify any LIHTC project that is HERA (P.L. 110-289) enacted changes that allow 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 typically exchange or “sell” the tax credits for Upon receipt of an LIHTC award, developers typically exchange or “sell” 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
legally binds the two parties to satisfy federal tax requirements that the tax credit claimant have legally 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 allows income (or losses), deductions, and other tax items to be The partnership form also allows income (or losses), deductions, and other tax items to be
allocated directly to the individual partners.18 allocated directly to the individual partners.18
The sale is usually structured using a limited partnership between the developer and the investor, 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 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-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 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. passive role. Syndicators charge a fee for overseeing the investment transactions.

~~16 Individual income levels are certified by each property manager, although states have some discretion over the~~
Typically, investors do not expect their equity investment in a project to produce income. Instead, investors look to the credits, which will be used to offset their income tax liabilities, as their 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 typically ranges from the mid-$0.80s to low-$0.90s per $1.00 tax credit. The larger the difference 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 required to be used in the Section 8 housing Verification (EIV) system to verify tenant income. The EIV system is required to be used in the Section 8 housing
voucher program. voucher program.
17 Rent includes utility costs. 17 Rent includes utility costs.
18 For more details on the general tax equity mechanism, see CRS Report R45693, 18 For more details on the general tax equity mechanism, see CRS 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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~~Typically, investors do not expect their equity investment in a project to produce income. Instead,~~
~~investors look to the credits, which will be used to offset their income tax liabilities, as their~~
~~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~~
~~typically 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 will affect the price investors are willing to pay. claim tax benefits in addition to the tax credits will affect the price investors are willing 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 institutions and banks are responsible for the majority of investment in partnerships. Financial institutions and banks are responsible for the majority of investment in
LIHTC.19 Partly this is due to the Community Reinvestment Act (CRA), which considers LIHTC LIHTC.19 Partly this is due to the Community Reinvestment Act (CRA), which considers LIHTC
investments favorably.20 Other investors include real estate, insurance, utility, and manufacturing investments favorably.20 Other investors 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. firms, which are seeking a return in the 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 well, some of which may be in the form of state tax credits modeled after the federal financing as well, some of which may be in the form of state tax credits modeled after the federal
provision. Additionally, some LIHTC projects may have tenants who receive other government provision. Additionally, some LIHTC projects may have tenants who receive other government
subsidies such as housing vouchers. subsidies 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~~
The most recent legislative changes that affected the LIHTC program were included in the law commonly known as the Inflation Reduction Act of 2022 (P.L. 117-169; IRA). The changes allow developers that combine LIHTC with either the Section 48 energy investment tax credit or the Section 45L new energy efficient homes credit to realize the full benefits of those credits without reducing LIHTC amounts. Prior to that, the most recent legislative changes to the LIHTC were included in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of P.L. 116-260), which set a permanent minimum credit (or “floor”) of 4% for the housing tax credit that is typically combined with tax-exempt bond financing and used for the rehabilitation of affordable housing. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 also increased, for calendar years 2021 and 2022, the credit allocation authority for buildings located in a qualified disaster zone. 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 was equal to any unused increased credit allocation authority from 2021. Buildings impacted by this provision were also granted a one-year extension of the placed-in-service deadline and the so-called 10% test. In the 117th Congress, there were a number of legislative proposals that would have modified and expanded the LIHTC program, most notably the Affordable Housing Credit Improvement Act of Affordable Housing Credit Improvement Act of 2021 (S. 1136/H.R. 2573) and the various iterations of the Build Back Better Act (BBBA). The Affordable Housing Credit Improvement Act of 2021 formed the bases for most of the proposals in the BBBA, but included a broader set of changes to the LIHTC program. Neither act was enacted into law. A previous version of the Affordable Housing Credit Improvement Act was introduced in the 116th Congress. ~~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, 19 For more information on the LIHTC investor landscape, see CohnReznick, LLP, Housing Tax Credits Investments:
Investment and Operational Performance, November 18, 2019. , November 18, 2019.
20 For more information on the LIHTC program and the CRA, see Office of the Comptroller of the Currency, 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, , Washington, DC, April 2014,
http://www.occ.gov/topics/community-affairs/publications/insights/insights-low-income-housing-tax-credits.pdf. http://www.occ.gov/topics/community-affairs/publications/insights/insights-low-income-housing-tax-credits.pdf.
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~~housing tax credit typically used for the rehabilitation of affordable housing. The Joint Committee~~
~~on Taxation estimates this change will reduce federal revenues by $5.8 billion 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.~~

Author Information

Mark P. Keightley Mark P. Keightley

Specialist in Economics Specialist in Economics

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
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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.~~
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