An Introduction to the Low-Income Housing
January 6, 2023
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 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 (mostly 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 federal government an average of approximately
$10.9 billion annually.
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 program 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 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, 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 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
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 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
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
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
Types of Credits
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%
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
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
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
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
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. These 4% tax credits are not drawn from a state’s annual LIHTC allocation
authority.
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
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
common currency—today’s dollars.
4 IRC §42(b).
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An Introduction to the Low-Income Housing Tax Credit

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 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
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 Taxpayer
Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated
Appropriations Act, 2021 (P.L. 116-260), sets a minimum credit (or “floor”) of 4% for the
housing tax credit 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
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
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)
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,
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
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
§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%
subsidy has been below 4%. Novogradac & Company LLP, Low-Income Housing Tax Credit Handbook, 2006 ed.
(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.
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-
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
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.
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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 potentially 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 potentially 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 mid-June 2022, the rate was
around 3.25%.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
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
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
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
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
families—that otherwise may not be financially 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 million) 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.
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
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
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
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
computing the credit rate.
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.
12 Treasury does not directly use the interest rate on 10-year bonds, but as discussed in footnote 5, the interest rate used
by Treasury is based on the yields on U.S. Treasury securities.
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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
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
allocation authority equal to $2.75 per person, with a minimum small population state allocation
of $3,185,000.13 The state allocation limits do not apply to the 4% credits that are 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
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
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, allowing for input from the general public
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.
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
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
entire previous allotment of tax credits. This use-or-lose feature gives states an incentive to
allocate all of their tax credits to developers.
To be eligible for an LIHTC allocation, properties are required to meet certain tests that restrict
both the amount of rent that may be charged and the income of eligible tenants. Historically, the
“income test” for a qualified low-income housing project has required project owners to
irrevocably elect one of two income-level tests, either a 20-50 test or a 40-60 test. To satisfy the
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, Revenue Procedure 2022-38, 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,
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.
14 Tax-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 Grant A. Driessen.
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.
To be granted this extension, known as a carryover allocation, at least 10% of anticipated costs must be incurred within
the first calendar year.
16 Individual income levels are certified by each property manager, although states have some discretion over the
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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,
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 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,
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 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.
Developers and Investors
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
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
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
allocated directly to the individual partners.18
The sale is usually structured using a limited partnership between the developer and the investor,
and sometimes administered by syndicators. As the general partner, the developer has a relatively
small ownership percentage but maintains the authority to build and run the project on a day-to-
day basis. The investor, as a limited partner, has a large ownership percentage with an otherwise
passive role. Syndicators charge a fee for overseeing the investment transactions.
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
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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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 will affect the price investors are willing to pay.
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
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
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 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
subsidies such as housing vouchers.
Recent Legislative Developments
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
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.

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.
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Author Information

Mark P. Keightley

Specialist in Economics

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