As the need for affordable housing continues to grow across the United States, the Low-Income Housing Tax Credit (LIHTC) program remains one of the most effective tools for developing and maintaining affordable communities. Introduced in 1986, LIHTC encourages private investment in affordable development by offering tax incentives to builders and investors who create or rehabilitate rental housing for low-income households. Understanding how tax credit housing works is essential for anyone interested in community development, housing policy, or public-private partnerships that strengthen access to quality homes.
In 2025, the LIHTC program continues to be the backbone of affordable housing production—supporting millions of families, seniors, and individuals with disabilities. It bridges the gap between market-rate construction costs and what low-income renters can afford, making it a cornerstone of the nation’s affordable housing strategy.
This guide explains how the Low-Income Housing Tax Credit program functions, who benefits from it, and why it remains critical to solving America’s housing affordability crisis.
What Is the Low-Income Housing Tax Credit (LIHTC)?
The Low-Income Housing Tax Credit (LIHTC) is a federal program administered by the U.S. Department of the Treasury and the Internal Revenue Service (IRS). It provides tax incentives to private investors who finance the construction or rehabilitation of affordable rental housing. In exchange, property owners agree to maintain a set percentage of units at reduced rents for low-income tenants—typically for at least 30 years.
Rather than providing direct funding, LIHTC reduces a developer’s federal tax liability over a 10-year period. This reduction offsets the high costs of developing or maintaining affordable units, making projects financially viable without relying solely on public housing funds or grants.
The program is administered at the state level by housing finance agencies, which allocate credits to developers through a competitive application process. Projects are scored based on affordability, location, design, and community impact.
Key Goals of LIHTC
1. Expand Affordable Housing Supply: Encourage construction and preservation of affordable rental properties in both urban and rural areas.
2. Promote Private Investment: Leverage private capital to reduce public spending while achieving long-term housing goals.
3. Strengthen Communities: Support neighborhood revitalization and mixed-income housing developments.
How the LIHTC Program Works
The LIHTC program operates through a partnership between federal, state, and private entities. Each year, the federal government allocates a set amount of tax credits to states based on population. State housing agencies then distribute these credits to developers that meet specific program criteria.
Once awarded, developers sell the tax credits to investors—often banks or corporations—in exchange for upfront equity used to finance construction or rehabilitation. In return, investors receive tax reductions over ten years, while the developer agrees to maintain affordable rent levels for qualifying tenants.
Two primary types of LIHTC exist: the 9% credit and the 4% credit. The 9% credit is typically used for new construction projects without other federal subsidies, while the 4% credit is applied to projects financed with tax-exempt bonds or substantial rehabilitation efforts.
Basic Structure of LIHTC Financing
1. Allocation: State housing agencies receive annual credit authority from the IRS and award it to approved projects.
2. Investment: Developers sell credits to investors to raise capital and reduce the need for debt financing.
3. Compliance: Properties must meet affordability and quality standards for 15 years of active compliance, with an additional 15-year extended use period.
Who Qualifies for Tax Credit Housing?
LIHTC properties are reserved for low- to moderate-income renters, typically those earning less than 60% of the area median income (AMI). Rents in these units are capped based on income limits set by the U.S. Department of Housing and Urban Development (HUD), ensuring that tenants pay no more than 30% of their adjusted income for rent and utilities.
Each development must commit a certain portion of its units to affordable housing, often using the “20/50” or “40/60” rule. Under these rules, either 20% of units must be occupied by households earning below 50% of AMI, or 40% must be occupied by households earning below 60% of AMI. In 2025, many projects now use an income-averaging model to serve a broader range of families within the affordability guidelines.
Priority often goes to developments that target underserved populations such as seniors, veterans, and individuals with disabilities, or those located in high-opportunity areas with access to jobs, schools, and transportation.
Tenant Eligibility Factors
1. Income Limits: Based on household size and local median income.
2. Background Checks: Standard credit and rental history screenings apply, as with traditional rentals.
3. Rent Restrictions: Tenants pay reduced rent tied to their verified income bracket.
How LIHTC Differs from Public Housing
While both programs serve low-income residents, LIHTC operates very differently from traditional public housing. Public housing developments are owned and managed by government agencies, whereas LIHTC projects are privately owned but regulated through state and federal oversight. This structure allows for a mix of affordable and market-rate units within a single property, promoting socioeconomic diversity.
Additionally, LIHTC relies heavily on private-sector participation, which reduces the financial burden on taxpayers and fosters innovation in housing design and management. As a result, tax credit housing developments often blend seamlessly into their communities—offering modern amenities and long-term sustainability without the stigma sometimes associated with older public housing projects.
In short, LIHTC represents a hybrid model that merges the efficiency of private investment with the social mission of public housing initiatives.
Key Differences
1. Ownership: LIHTC housing is privately owned, while public housing is government-operated.
2. Funding Source: LIHTC uses tax credits instead of direct federal subsidies.
3. Community Integration: Tax credit housing often includes mixed-income residents and modern amenities.
The Impact of LIHTC on Affordable Development
Since its inception, the LIHTC program has financed over 3.7 million affordable housing units nationwide, making it the largest affordable housing initiative in the United States. Each year, it helps create roughly 100,000 new rental units and supports hundreds of thousands of jobs in construction, property management, and social services.
Beyond increasing housing availability, LIHTC developments stimulate local economies, reduce homelessness, and improve neighborhood quality. Studies show that communities near tax credit housing experience stable or rising property values over time—debunking myths that affordable housing lowers surrounding values.
As housing affordability remains a top national issue, the LIHTC program continues to evolve. Proposals for 2025 include expanding annual credit allocations and simplifying compliance rules to accelerate development in high-need areas.
Key Benefits of the LIHTC Program
1. Large-Scale Impact: Generates thousands of affordable units annually across all 50 states.
2. Economic Growth: Creates jobs and revitalizes communities through private investment.
3. Long-Term Affordability: Ensures housing remains accessible for decades through extended use agreements.
Challenges and Future Outlook
While LIHTC has been remarkably successful, it faces challenges. Rising construction costs, limited credit allocations, and complex compliance requirements can slow development. Additionally, maintaining affordability beyond the 30-year minimum remains a concern as some properties transition to market-rate rents after their compliance periods end.
To address these issues, policymakers and housing advocates are pushing for program modernization—such as increasing funding, incentivizing deeper affordability, and expanding credit access to smaller developers. These updates aim to preserve LIHTC’s effectiveness in a changing housing landscape.
As America’s population grows and housing costs climb, expanding LIHTC remains one of the most practical and bipartisan solutions to the affordable housing shortage.
Proposed Improvements
1. Expanded Credit Caps: Increase annual credit allocations to meet rising construction demand.
2. Simplified Compliance: Streamline reporting and income verification requirements for developers.
3. Preservation Incentives: Encourage long-term affordability beyond the initial compliance period.
Key Takeaway
The Low-Income Housing Tax Credit program has proven to be a cornerstone of America’s affordable housing system—leveraging private capital to build homes for millions in need. By supporting tax credit housing and fostering partnerships between public and private sectors, LIHTC enables sustainable, inclusive, and community-based development. As policymakers look ahead, expanding and modernizing LIHTC will be essential to ensuring that affordable development keeps pace with the nation’s growing housing demand.
