An Introduction to the Low-Income Housing
January 15, 2021
Tax Credit
Mark P. Keightley
The low-income housing tax credit (LIHTC) program is the federal government’s primary policy
Specialist in Economics
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
agreeing to reserve a certain fraction of units that are rent-restricted and for lower-income

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 (e.g., corporations, financial institutions)
in exchange for equity financing. The equity reduces the financing developers would otherwise have to secure and allows tax
credit properties to offer more affordable rents. The LIHTC is estimated to cost the government an average of approximately
$10.9 billion annually.
The 2018 Consolidated Appropriations Act (P.L. 115-141) made two changes to the LIHTC program. First, the act increased
the amount of credits available to states each year by 12.5% for years 2018 through 2021. This modification appeared to be in
response to concerns over the effects of P.L. 115-97, commonly referred to as the Tax Cuts and Jobs Act (TCJA). The
changes made by TCJA did not directly alter the LIHTC program; however, the act reduced corporate taxes, which had the
potential to reduce demand for LIHTCs. Second, the act modified the so-called “income test,” which determines the
maximum income an LIHTC tenant may have. Previously, each individual tenant was required to have an income below one
of two threshold options (either 50% or 60% of area median gross income [AMI], depending on an election made by the
property owner). With the modification, property owners may use a third income test option that allows them to average the
income of tenants when determining whether the income restriction is satisfied, but no tenant may have an income in excess
of 80% of AMI.
To assist certain areas of California that were affected by natural disasters in 2017 and 2018, the Further Consolidated
Appropriations Act, 2020 (P.L. 116-94) increased California’s 2020 LIHTC allocation by the lesser of the state’s 2020
LIHTC allocations to buildings located in qualified 2017 and 2018 California disaster areas, or 50% of the state’s combined
2017 and 2018 total LIHTC allocations.
Most recently, the COVID-Related Tax Relief Act of 2020, enacted as Subtitle B to Title II of Division N of the
Consolidated 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. The JCT estimates this change will reduce federal revenues by
$5.8 billion between FY2021 and FY2030. This change is permanent.
There were also a number of bills introduced in the 116th Congress that would have made targeted changes to the LIHTC
program. These proposals included H.R. 4984, H.R. 4865 and S. 767, H.R. 4689, H.R. 3479 and S. 1956, and H.R. 3478.
Broader changes to the program were proposed by the Affordable Housing Credit Improvement Act of 2019 (H.R. 3077/S.
1703).

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
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
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
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
means it is completed and available to be rented. Due to the need for upfront financing to
complete construction, developers typical y sel the 10-year stream of tax credits to outside
investors (e.g., corporations, 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 financing costs, it becomes financial y feasible for tax credit properties to charge
lower rents, and thus, potential y expand the supply of affordable rental housing. The LIHTC
program is estimated to cost the government an average of $10.9 bil ion annual y.1
Types of Credits
There are two types of LIHTCs available to developers. The so-cal ed 9% credit is general y
reserved for new construction and is intended to deliver up to a 70% subsidy. The so-cal ed 4%
credit is typical y used for rehabilitation projects utilizing at least 50% in federal y tax-exempt
bond financing and is designed to deliver up to a 30% subsidy. This report wil 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 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 construction excluding land).3 The subsidy levels (30% or 70%) are explicitly specified in the
Internal Revenue Code (IRC).4

1 Computed as the average estimated tax expenditure associat ed with the program between FY2020 and FY2024. T his
figure does not include revenue loss associated with instituting a minimum credit of 4% for the housing tax credit
typically used for the rehabilitation of affordable housing as part of the COVID-Related T ax Relief Act of 2020,
enacted as Subtitle B to T itle II of Division N of the Consolidated Appropriations Act, 2021 (P.L. 116-260). T his
change is estimated to reduce federal revenues by $5.8 billion between FY2021 and FY2030. U.S. Congress, Joint
Committee on T axation, Estim ates of Federal Tax Expenditures for Fiscal Years 2020-2024, committee print,
November 5, 2020, JCX-23-20; and Joint Committee on T axation, Estim ated Budget Effects of the Revenue Provisions
Contained in Rules Com m ittee Print 116-68, the “Consolidated Appropriations Act, 2021,” JCX-24-20, December 21,
2020.
2 T hese 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. T he 9% credit is also commonly referred to as the “competitive credit” because awards of
9% credits are drawn from a state’s annual LIHT C allocation authority and developers must compete for an award. T he
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
automatically awarded 4% tax credits. T hese 4% tax credits are not drawn from a state’s annual LIHT C allocation
authority.
3 T he 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
opportunity to earn a return on investments. Effectively, a dollar received today and a dollar received in five years are
in different currencies. T he present value calculation converts dollar amounts received at different points in time into a
common currency—today’s dollars.
4 IRC §42(b).
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The U.S. Department of the Treasury uses a formula to determine the credit rates that wil
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
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.
Once the credit rate has been determined, it is multiplied by the development’s qualified basis to
obtain the amount of LIHTCs a project wil receive each year for 10 years. The credit rate stays
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
time.
Minimum Credit Rates
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
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
rehabilitation credit rate has been below 4% every month since January 1988.6 The COVID-
Related Tax Relief Act of 2020, enacted as Subtitle B to Title II of Division N of the Consolidated
Appropriations Act, 2021 (P.L. 116-260), sets a minimum credit (or “floor”) of 4% for the
housing tax credit typical y used for the rehabilitation of affordable housing. In other words, the
effective rehabilitation credit rate cannot fal below 4%. This change applies to buildings placed
in service starting in 2021 and is permanent.
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
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
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-
113).8

5 T he 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 T reasury use an interest rate equal to 72% of the average of the mid-term applicable
federal rate and the long-term applicable federal rate. T he mid- and long-term applicable federal rates are, in turn,
based on the yields on U.S. T reasury securities. It could be argued that this interest rate, also known as the discount
rate, should be higher because LIHT C investments are riskier th an T reasury securities. If this were true, then the
LIHT C 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 in terest rate specified in IRC
§42(b), this report does not consider how the use of alternative discount rates would affect the program.
6 T he 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, Low-Incom e Housing Tax Credit Handbook, 2006 ed.
(T homson West, 2006), pp. 845-850; Novogradac & Company LLP, “ Tax Credit Percentages 2021,”
https://www.novoco.com/resource-centers/affordable-housing-tax-credits/tax-credit-percentages-2021.
7 T he floor technically applied to properties that were “placed in service” during that time period.
8 T he 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. T he American T axpayer Relief
Act of 2012 (P.L. 112-240) extended the 9% floor for credit allocations made before January 1, 2014. T he T ax Increase
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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 wil be determined by Treasury’s
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
9%. When this happens, new construction projects can potential y receive a subsidy above 70%,
with the subsidy increasing the farther the credit rate determined by Treasury’s formula is below
9%.9 Similarly, rehabilitation projects can potential y receive a subsidy above 30%. The current
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
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 January 2021, the rate was
around 1%.12 Thus, interest rates would need to increase significantly from current levels for 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
affordable housing development. Consider a new apartment complex with a qualified basis of $1
mil ion. Since the project involves new construction it wil qualify for the 9% credit and,
assuming for the purposes of this example that the credit rate is exactly 9%, wil generate a
stream of tax credits equal to $90,000 (9% × $1 mil ion) 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
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 financial y viable
are lower than they otherwise would be. Thus, the subsidy is intended to incentivize the
development of housing at lower rent levels—and thus affordable to lower-income families—that
otherwise may not be financial y feasible or attractive relative to alternative investments.
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 mil ion) per year
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.

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 T ax Hikes Act (or “ PATH” Act) permanently extended the 9% floor.
9 T reasury’s formula is designed to produce credit rates necessary to deliver either a 30% or 70% subsidy. T hese credit
rates can be, and often are, less than 4% and 9%. For example, the January 2021 tax credit rate, as determined by
T reasury’s formula, for rehabilitation construction was 3.09% and the rate for new construction was 7.21%. 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.
Because these credit rates are above what is needed to deliver a 30% subsidy (3.09%) and 70% subsidy (i.e., 7.21%), it
means that the subsidies rise above 30% and 70% when the floors takes effect.
10 T his relationship is an intrinsic feature of the present value formula, and not a result of a decision by T reasury in
computing the credit rate.
11 Board of Governors of the Federal Reserve System (US), 10 -Year T reasury Constant Maturity Rate [DGS10],
retrieved from FRED, Federal Reserve Bank of St. Louis, January 8, 2020, https://fred.stlouisfed.org/series/DGS10.
12 T reasury does not directly use the int erest rate on 10-year bonds, but as discussed in footnote 5, the interest rate used
by T reasury is based on the yields on U.S. T reasury securities.
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An Introduction to the Low-Income Housing Tax Credit

The Allocation Process
The process of al ocating, awarding, and then claiming the LIHTC is complex and lengthy. The
process begins at the federal level with each state receiving an annual LIHTC al ocation in
accordance with federal law. The administration of the tax credit program is typical y carried out
by each state’s housing finance agency (HFA). State HFAs al ocate credits to developers of rental
housing according to federal y required, but state-created, al ocation plans. The process typical y
ends with developers sel ing awarded credits to outside investors in exchange for equity. A more
detailed discussion of each level of the al ocation process is presented below.
Federal Allocation to States
LIHTCs are first al ocated to each state according to its population. In 2021, states wil receive
LIHTC al ocation authority equal to $2.8125 per person, with a minimum smal population state
al ocation of $3,245,625.13 These figures reflect a temporary increase in the amount of credits
each state received as a result of the 2018 Consolidated Appropriations Act (P.L. 115-141). The
increase is equal to 12.5% above what states would have received absent P.L. 115-141, and is in
effect through 2021. The state al ocation limits do not apply to the 4% credits, which are
automatical y packaged with tax-exempt bond financed projects.14
State Allocation to Developers
State HFAs al ocate credits to developers of eligible rental housing according to federal y
required, but state-created, qualified al ocation plans (QAPs). Federal law requires that a QAP
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
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).
QAPs are developed and revised via a public process, al owing for input from the general public
and local communities, as wel as LIHTC stakeholders. Many states have two al ocation periods
per year. Developers apply for the credits by proposing plans to state agencies.
An al ocation to a developer does not imply that al al ocated tax credits wil be claimed. An
al ocation simply means tax credits are set aside for a developer. Once a developer receives an
al ocation it general y 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 al ocated 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 al ocation, a state must have al ocated its entire previous al otment of tax

13 Internal Revenue Service, Revenue Procedure 2020-45, https://www.irs.gov/pub/irs-drop/rp-20-45.pdf. From 1986
through 2000, the initial credit allocation amount was $1.25 per capita. T he allo cation 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
small states was $2,000,000, and was indexed for inflation annually after 2003.
14 T ax-exempt bonds are issued subject to a private activity bond volume limit per state. For more information, see
CRS Report RL31457, Private Activity Bonds: An Introduction , by Steven Maguire and Joseph S. Hughes.
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.
T o be granted this extension, known as a carryover allocation, at least 10% of anticipated costs must be incurred within
the first calendar year.
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credits. This use-or-lose feature gives states an incentive to al ocate al of their tax credits to
developers.
To be eligible for an LIHTC al ocation, properties are required to meet certain tests that restrict
both the amount of rent that may be charged and the income of eligible tenants. Historical y, the
“income test” for a qualified low-income housing project has required project owners to
irrevocably elect one of two income-level tests, either a 20-50 test or a 40-60 test. To satisfy the
first test, at least 20% of the units must be occupied by individuals with income of 50% or less of
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
al ows owners to average the income of tenants. Specifical y, under the income averaging option,
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
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
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
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
The types of projects eligible for the LIHTC include rental housing located in multifamily
buildings, single-family dwel ings, duplexes, and townhouses. Projects may include more than
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.
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
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%.
HERA (P.L. 110-289) enacted changes that al ow 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.
Developers and Investors
Upon receipt of an LIHTC award, developers typical y exchange or “sel ” the tax credits for
equity investment in the real estate project. The “sale” of credits occurs within a partnership that
legal y 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
than the trading of corporate stock, which occurs between two unrelated parties on an exchange.
The partnership form also al ows income (or losses), deductions, and other tax items to be
al ocated directly to the individual partners.18

16 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
voucher program.
17 Rent includes utility costs.
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 .
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The sale is usual y structured using a limited partnership between the developer and the investor,
and sometimes administered by syndicators. As the general partner, the developer has a relatively
smal ownership percentage but maintains the authority to build and run the project on a day-to-
day basis. The investor, as a limited partner, has a large ownership percentage with an otherwise
passive role. Syndicators charge a fee for overseeing the investment transactions.
Typical y, investors do not expect their equity investment in a project to produce income. Instead,
investors look to the credits, which wil 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
typical y 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
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
claim tax benefits in addition to the tax credits wil affect the price investors are wil ing to pay.
The vast majority of investors are corporations, either investing directly or through private
partnerships. Financial firms are large investors in LIHTC. Partly this is due to the Community
Reinvestment Act (CRA), which considers LIHTC investments favorably.19 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.
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
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
financing as wel , some of which may be in the form of state tax credits modeled after the federal
provision. Additional y, some LIHTC projects may have tenants who receive other government
subsidies such as housing vouchers.
Recent Legislative Developments
Most recently, the COVID-Related Tax Relief Act of 2020, enacted as Subtitle B to Title II of
Division N of the Consolidated Appropriations Act, 2021 (P.L. 116-260), sets a minimum credit
(or “floor”) of 4% for the housing tax credit typical y used for the rehabilitation of affordable
housing. The JCT estimates this change wil reduce federal revenues by $5.8 bil ion between
FY2021 and FY2030.20 This change is permanent.
To assist certain areas of California that were affected by natural disasters in 2017 and 2018, the
Further Consolidated Appropriations Act, 2020 (P.L. 116-94) increased California’s 2020 LIHTC
al ocation by the lesser of (1) the state’s 2020 LIHTC al ocations to buildings located in qualified
2017 and 2018 California disaster areas, or (2) 50% of the state’s combined 2017 and 2018 total
LIHTC al ocations.

19 For more information on the LIHTC program and the CRA, see Office of the Comptroller of the Currency, Low-
Incom e Housing Tax Credits: Affordable Housing Investm ent Opportunities for Banks, Washington, DC, April 2014,
http://www.occ.gov/topics/community-affairs/publications/insights/insights-low-income-housing-tax-credits.pdf.
20 Joint Committee on T axation, Estimated Budget Effects of the Revenue Provisions Contained in Rules Committee
Print 116-68, the “Consolidated Appropriations Act, 2021,” JCX-24-20, December 21, 2020.
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Author Information

Mark P. Keightley

Specialist in Economics

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