Low-Income Housing Tax Credit (LIHTC)
The Low-Income Housing Tax Credit (LIHTC) is a federal tax credit that funds the construction and rehabilitation of affordable rental housing in the United States. State housing agencies award the credits to developers, who sell them to investors for equity, and in return the property must rent units to lower-income households at restricted rents.
Why LIHTC matters
LIHTC was created by the Tax Reform Act of 1986 as Section 42 of the Internal Revenue Code, and it is the federal government's largest program for producing affordable rental housing. Most affordable multifamily developments combine tax credit equity with other financing.
Tax credit properties follow strict rules. Residents must meet income limits tied to area median income, rents are capped, and the property must stay in compliance for a long compliance period. Failing to comply can lead to the loss of credits, so owners and lenders track compliance closely.
Underwriting LIHTC deals differs from market-rate underwriting. Rents are set by program limits, so income growth is limited, while operating and compliance costs are often higher. Lenders focus on debt service coverage at restricted rents and on the strength of the sponsor.
9 Percent vs. 4 Percent Credits
The 9 percent credit is awarded competitively by state agencies and covers a larger share of project costs, usually for new construction. The 4 percent credit comes with tax-exempt bond financing and covers a smaller share of costs. The choice between them shapes how much other financing a project needs.
Where it matters by property type
LIHTC underwriting is covered in more depth on the affordable housing underwriting page.
How Smart Capital Center handles LIHTC properties
Smart Capital Center's AI agents underwrite tax credit properties at restricted rents, read compliance documents and track program requirements alongside the loan. Rose Community Capital reviews significantly more applications with greater depth and consistency using Smart Capital Center.
Frequently asked questions
How does the LIHTC program work?
The federal government allocates tax credits to each state, and state housing agencies award them to developers through a competitive process or alongside tax-exempt bonds. Developers sell the credits to investors, often banks, for equity that reduces the debt a project needs. Investors claim the credits over ten years while the property meets its affordability rules.
What is area median income in LIHTC?
Area median income is the midpoint income for a region, published each year by HUD and adjusted for household size. LIHTC income and rent limits are set as a percentage of it, commonly 50 or 60 percent, and an income averaging option allows some units at other levels.
How long do LIHTC properties stay affordable?
Federal rules require a 15-year compliance period followed by an extended use period, for a total of at least 30 years of affordability. Many states require longer affordability terms in exchange for awarding credits, so the actual commitment on a given property is often longer.