An Introduction to the Low-Income Housing Tax Credit

Changes from January 6, 2023 to April 26, 2023

This page shows textual changes in the document between the two versions indicated in the dates above. Textual matter removed in the later version is indicated with ~~red strikethrough~~ and textual matter added in the later version is indicated with blue.

An Introduction to the Low-Income Housing
~~January 6~~April 26, 2023 , 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~~13.5 billion annually. In the 118th Congress, the Decent, Affordable, Safe Housing for All (DASH) Act (S. 680) would make a number of changes to the LIHTC program, in addition to affordable housing policy more generally. The proposed changes to the LIHTC include  lowering the bond threshold on developments that combine LIHTCs with tax-exempt bond financing from 50% to 25%;  increasing the amount of tax credits states receive in 2023 from $2.75 per person to $3.90 per person, and then to $4.875 per person in 2024 (not including an inflation adjustment that would apply in 2024), and adjusting for inflation thereafter;  requiring that at least 8% of a state’s annual allocation authority be reserved for buildings serving extremely low income households;  designating Indian areas and rural areas as difficult to develop areas (DDAs);  allowing state housing finance agencies (HFAs) to provide a 30% basis boost to properties utilizing 4% credits and tax-exempt bond financing if deemed necessary for financial feasibility;  providing a 50% basis boost for projects that reserve dedicated space for providing qualified supportive services;  removing the requirement that state HFAs notify local jurisdictions of proposed LIHTC projects in such jurisdictions and removing the requirement that HFAs give jurisdictions reasonable opportunity to comment on the project;  repealing the qualified contract option; and  modifying and clarifying the right of first refusal rules ~~billion annually~~. .
The most recent legislative changes that affected the LIHTC program were included in the law commonly known as 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 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 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 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 Act of 2020 (Division EE of P.L. 116-260), which set a 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 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 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 any qualified disaster also increased, for calendar years 2021 and 2022, the credit allocation authority for buildings located in any 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. 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 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-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. 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 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 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 iterations of the Build Back Better Act (BBBA). The Affordable Housing Credit Improvement Act of 2021 formed the ~~bases~~basis
for most of the proposals in the BBBA, but included a broader set of changes to the LIHTC program. Neither act was enacted 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.into law. A previous version of the Affordable Housing Credit Improvement Act was introduced in the 116th Congress.

Congressional Research Service Congressional Research Service

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 $13.5 billion annually.1 to cost the government an average of $13.5 billion annually.1
Types of Credits
There are two types of LIHTCs available to developers. The so-called There are two types of LIHTCs available to developers. The so-called “9% credit9% credit” is generally is generally
reserved for new construction and reserved for new construction and isrehabilitation projects not utilizing certain additional federal subsidies,2 and was originally intended to deliver up to a 70% subsidy. The so-called intended to deliver up to a 70% subsidy. The so-called “4% credit” 4%
~~credit~~ is typically used for is typically used for ~~rehabilitation~~ projects utilizing projects utilizing ~~at least 50% in~~ federally tax-exempt federally tax-exempt
bond financing and bond financing and is was originally designed to deliver up to a 30% subsidy.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”~~
~~to facilitate the discussion.2~~3 The 30% and 70% subsidy levels are computed as the present value 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).of construction excluding land).34 The subsidy levels The subsidy levels (30% or 70%) are explicitly specified in the (30% or 70%) are explicitly specified in the
Internal Revenue Code (IRC)Internal Revenue Code (IRC).4, though as discussed in the next section, they may be higher due to a number of legislative changes.5
The U.S. Department of the Treasury uses a formula to determine the credit rates that will 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 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~~

1 Computed as the average estimated tax expenditure associated with the program between FY2022 and FY2026. U.S. 1 Computed as the average estimated tax expenditure associated with the program between FY2022 and FY2026. U.S.
Congress, Joint Committee on Taxation, Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2022-2026, JCX-22-, JCX-22-
22, December 22, 2022. 22, December 22, 2022.
2 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.~~So-called “acquisition-rehab” projects allow for 9% credits to be used to subsidize rehabilitation costs, but not acquisition costs. However, 4% credits can be used to subsidize acquisition costs. 3 The 9% credit is also commonly referred to as the “competitive credit” because awards of 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.
34 The present value concept allows for the comparison of dollar amounts that are received at different points in time 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.
45 IRC §42(b). IRC §42(b).
Congressional Research Service Congressional Research Service

1 1

An Introduction to the Low-Income Housing Tax Credit

~~the~~ according to market conditions. Given the current interest rate, Treasury’s formula determines the two different LIHTC rates that deliver the two desired subsidy levels (30% and 70%).two different LIHTC rates that deliver the two desired subsidy levels (30% and 70%).56 In 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 The ~~rehabilitation and new construction tax~~4% and 9% credits have credits have ~~ordinarily not been~~not always been exactly 4% and 9%. The Tax 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~~4% credit rate credit rate determined under the formula has been below 4% every month since January 1988.has been below 4% every month since January 1988.67 The Taxpayer 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), Appropriations Act, 2021 (P.L. 116-260), ~~sets~~set a minimum credit (or “floor”) of 4% a minimum credit (or “floor”) of 4% ~~for~~on the 4% credit ~~the~~
~~housing tax credit typically used for the rehabilitation of affordable housing~~. In other words, the . In other words, the
effective effective ~~rehabilitation~~4% credit rate cannot fall below 4%. This change applies to buildings placed 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 The ~~new construction~~9% credit rate had similarly been below its nominal 9% rate every month since 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 temporary ~~minimum credit~~floor of 9% of 9% ~~for the new construction~~ under the credit. The minimum credit applied to credit. The minimum credit applied to
developments completed in August 2008 through the end of 2013.developments completed in August 2008 through the end of 2013.78 Following a number of 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).113).89
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 will be determined by Treasury’s Treasury’s formula are at least 4% and 9%; the credit rates will be determined by Treasury’s
formula and generate subsidies of up to 30% and 70%, respectively. If, however, the credit rates
56 The choice of interest rate will affect the credit rate that is needed to deliver the specified subsidy levels. IRC §42(b) 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.
67 The 4% credit rate was 4% during the first year of the program. Since then the rate needed to produce the 30% 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-https://www.novoco.com/resource-centers/affordable-housing-tax-credits/tax-credit-percentages-~~2022~~2023. .
78 The floor technically applied to properties that were “placed in service” during that time period. The floor technically applied to properties that were “placed in service” during that time period.
89 The floor was originally enacted on a temporary basis by the Housing and Economic Recovery Act of 2008 (P.L. 110- 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
Prevention Act of 2014 (P.L. 113-295) retroactively extended the 9% floor through the end of 2014. Division Q of P.L. 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)114-113—the Protecting Americans from Tax Hikes Act (or “PATH” Act) —permanently extended the 9% floor. permanently extended the 9% floor.
Congressional Research Service Congressional Research Service

2 2

link to page 5 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~~
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, 9%. When this happens, ~~new construction~~LIHTC projects can potentially receive projects can potentially receive ~~a subsidy above~~subsidies above 30% or 70%, 70%,
with the with the ~~subsidy~~subsidies increasing the farther the credit rate determined by Treasury’s formula is below 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~~
~~interest rate is the key factor determining whether the floors take effect.~~4% and 9%.10 Treasury’s formula 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.are high.1011 In December 1990, when Treasury’s formula last determined a credit rate above 9% 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%.(9.06%), the 10-year Treasury constant maturity rate was 8.08%.1112 In mid- In mid-~~June~~April 2022, the rate was 2022, the rate was
around 3.around 3.~~25%.12~~57%.13 Thus, interest rates would need to increase significantly from current levels for 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
millionmillion~~. Since the project involves new construction it will qualify for~~ that is utilizing the 9% credit the 9% credit ~~and,~~
~~assuming~~. Assuming for the purposes of this example that the credit rate is exactly 9%, for the purposes of this example that the credit rate is exactly 9%, the development will generate a 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 The situation would be similar if the project involved ~~rehabilitated construction~~4% credits except the 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.
The Allocation Process
The process of allocating, awarding, and then claiming the LIHTC is complex and lengthy. The 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 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 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 housing according to federally required, but state-created, allocation plans. The process typically
910 Treasury’s formula is designed to produce credit rates necessary to deliver either a 30% or Treasury’s formula is designed to produce credit rates necessary to deliver either a 30% or a 70% subsidy. These credit 70% subsidy. These credit
rates can be, and often are, less than 4% and 9%. For example, the rates can be, and often are, less than 4% and 9%. For example, the ~~June 2022 tax~~May 2023 effective 4% credit rate, as determined by credit rate, as determined by
Treasury’s formula, Treasury’s formula, ~~for rehabilitation construction was 3.30% and the rate for new construction was 7.70~~was 3.36% and the effective 9% credit rate was 7.84%. 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.
Because these credit rates are above what is needed to deliver a 30% subsidy (3.Because these credit rates are above what is needed to deliver a 30% subsidy (3.3036%) and %) and a 70% subsidy (7.70% subsidy (7.7084%), ~~%), it~~
~~means that~~ the subsidies the subsidies could rise above 30% and 70% when the floors rise above 30% and 70% when the floors ~~takes effect.~~
10take effect. Projects are not required to receive the subsidy that results from either the Treasury formula or the minimum floors because IRC §42(m)(2) directs states’ HFAs not to award a project more credits than is necessary to make it financial feasible. 11 This relationship is an intrinsic feature of the present value formula, and not a result of a decision by Treasury in 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.
1112 Board of Governors of the Federal Reserve System (US), 10-Year Treasury Constant Maturity Rate [DGS10], 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, retrieved from FRED, Federal Reserve Bank of St. Louis, ~~June 22~~April 25, 2022, https://fred.stlouisfed.org/series/DGS10. , 2022, https://fred.stlouisfed.org/series/DGS10.
1213 Treasury does not directly use the interest rate on 10-year bonds, but as discussed in footno Treasury does not directly use the interest rate on 10-year bonds, but as discussed in footnote 56, 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.
Congressional Research Service Congressional Research Service

3 3

An Introduction to the Low-Income Housing Tax Credit

~~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~~
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 2023, states have LIHTC LIHTCs are first allocated to each state according to its population. In 2023, states have LIHTC
allocation authority equal to $2.75 per person, with a minimum small population state allocation allocation authority equal to $2.75 per person, with a minimum small population state allocation
of $3,185,000.of $3,185,000.1314 The state allocation limits do not apply to the 4% credits that are automatically The state allocation limits do not apply to the 4% credits that are automatically
packaged with tax-exempt bond financed projects.packaged with tax-exempt bond financed projects.1415
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. Once a developer receives an allocation it generally has two years to complete its project.1516
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 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.for family size.1617

1314 Internal Revenue Service, Internal Revenue Service, Revenue Procedure 2022-38, https://www.irs.gov/pub/irs-drop/rp-22-38.pdf. From 1986 , https://www.irs.gov/pub/irs-drop/rp-22-38.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.
1415 Tax-exempt bonds are issued subject to a private activity bond volume limit per state. For more information, see 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.
1516 Developers must have the property placed in service in the calendar year an allocation is made. However, a 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.
1617 Individual income levels are certified by each property manager, although states have some discretion over the Individual income levels are certified by each property manager, although states have some discretion over the
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 Congressional Research Service Congressional Research Service

4 4

An Introduction to the Low-Income Housing Tax Credit

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.AMI, depending on which income test option the project elected.1718
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.allocated directly to the individual partners.1819
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.
Typically, investors do not expect their equity investment in a project to produce income. Instead, 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 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 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
typically ranges from the mid-$0.80s to low-$0.90s per $1.00 tax credit. The larger the difference 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~~
~~Verification (EIV) system to verify tenant income. The EIV system is required to be used in the Section 8 housing~~
~~voucher program.~~
~~17 Rent includes utility costs.~~
18between 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 voucher program. 18 Rent includes utility costs. 19 For more details on the general tax equity mechanism, see CRS Report R45693, 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.
Congressional Research Service Congressional Research Service

5 5

An Introduction to the Low-Income Housing Tax Credit

~~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~~
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.LIHTC.1920 Partly this is due to the Community Reinvestment Act (CRA), which considers LIHTC Partly this is due to the Community Reinvestment Act (CRA), which considers LIHTC
investments favorably.investments favorably.2021 Other investors include real estate, insurance, utility, and manufacturing 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 the 118th Congress, the Decent, Affordable, Safe Housing for All (DASH) Act (S. 680) would make a number of changes to the LIHTC program, in addition to affordable housing policy more generally. The proposed changes to the LIHTC include  lowering the bond threshold on developments that combine LIHTCs with tax- exempt bond financing from 50% to 25%;  increasing the amount of tax credits states receive in 2023 from $2.75 per person to $3.90 per person, and then to $4.875 per person in 2024 (not including an inflation adjustment that would apply in 2024), and adjusted for inflation thereafter;  requiring that at least 8% of a state’s annual allocation authority, but not more than 13%, be reserved for buildings in which at least 20% of units are occupied by tenants whose income does not exceed the greater of 30% of AMI or 100% of the federal poverty line. These buildings would be eligible for a 50% basis boost if deemed necessary by an HFA to be financially feasible;  modifying the definition of DDAs for purposes of the low-income housing tax credit to include Indian areas. Projects in DDAs are eligible for a 30% basis boost under current law;  modifying the definition of DDAs to include rural areas. Projects in DDAs are eligible for a 30% basis boost under current law;  allowing HFAs to provide a 30% basis boost to properties utilizing 4% credits and tax-exempt bond financing if deemed necessary for financial feasibility. HFAs have this authority under current law for properties utilizing 9% credits; 20 For more information on the LIHTC investor landscape, see CohnReznick, LLP, Housing Tax Credits Investments: Investment and Operational Performance, November 18, 2019. 21 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  repealing the qualified contract option, which would limit the ability of a property owner to exit the LIHTC program after the first 15 years;  modifying and clarifying the right of first refusal rules, which would reduce the likelihood that certain properties exit the LIHTC program after the first 15 years;  removing the requirement that state HFAs notify local jurisdictions of proposed LIHTC projects in such jurisdictions and removing the requirement that HFAs give jurisdictions reasonable opportunity to comment on the project. HFAs would not be allowed to consider local jurisdiction approval as a selection criterion in QAPs; and  providing a 50% basis boost for projects which reserve dedicated space for providing qualified supportive services (e.g., health services, job training, childcare or eldercare, finance counseling). The most recent legislative changes that affected the LIHTC program were included in the law 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 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 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 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 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-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 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 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 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 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 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 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 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 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. 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 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 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 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 Affordable Housing Credit Improvement Act of 2021 formed the ~~bases~~basis for most of the proposals for most of the proposals
in the BBBA, but included a broader set of changes to the LIHTC program. Neither in the BBBA, but included a broader set of changes to the LIHTC program. Neither ~~act~~proposal was was
enacted into law. A previous version of the Affordable Housing Credit Improvement Act was enacted into law. A previous version of the Affordable Housing Credit Improvement Act was
introduced in the 116th Congress. introduced in the 116th Congress.

~~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.~~
Author Information Mark P. Keightley Specialist in Economics Congressional Research Service Congressional Research Service

67

An Introduction to the Low-Income Housing Tax Credit

~~Author Information~~

~~Mark P. Keightley~~

~~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
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material. copy or otherwise use copyrighted material.

Congressional Research Service Congressional Research Service
RS22389 RS22389 · VERSION 6770 · UPDATED
78