How the Low Income Housing Tax Credit Works

What the Low Income Housing Tax Credit Actually Is

The Low Income Housing Tax Credit (LIHTC) is a federal tax incentive that pays developers and property owners to build or renovate rental housing for people earning below a certain income threshold. It does not give money directly to renters. Instead, the government allows investors and developers to claim a tax credit—a dollar-for-dollar reduction in their federal income tax—when they own or finance housing that stays affordable for a set period, usually 15 to 30 years.

The credit comes from the U.S. Department of Housing and Urban Development (HUD) and is distributed to states, which then award it to specific housing projects. A developer uses the credit to attract investors, reduce construction costs, or lower the rents they charge. The result is rental housing that costs less than market rate, but the mechanism is a tax break for the property owner, not a subsidy paid to tenants.

Key Takeaways

The Low Income Housing Tax Credit is a tax deduction for developers and investors, not a direct payment to renters or a rental voucher program.
Housing built or renovated with this credit must keep rents affordable for residents earning 50 to 60 percent of the area median income, depending on the project.
Each state receives a pool of credits annually and awards them to projects through a competitive process; the amount available varies by state and year.
Tenants in LIHTC housing pay reduced rent but do not receive the credit themselves—the tax benefit flows to the property owner or investor.
To live in LIHTC housing, you must meet income limits set by the property, which are based on your household size and the area where the building is located.

How the Credit Reduces Rents for Tenants

A developer building a new apartment complex or renovating an existing one can apply for LIHTC through their state housing finance agency. If awarded, the developer receives credits worth a percentage of the project's cost—typically 4 or 9 percent of the total development cost per year for 10 years. An investor then buys these credits from the developer, paying cash upfront. That cash helps the developer pay for construction or renovation without borrowing as much money.

Because the developer's costs are lower, the rents can be lower too. A LIHTC property might charge $900 a month for a one-bedroom apartment when the market rate in that area is $1,400. The tenant pays the lower rent; the investor gets the tax credit on their personal or corporate return. This arrangement continues for the compliance period—the years during which the property must remain affordable. After that period ends, the owner can raise rents to market rate, though many properties remain affordable because the debt is paid off and the owner's costs are lower.

Income Limits and Who Can Live There

LIHTC housing is reserved for households earning no more than 50, 60, or 80 percent of the area median income (AMI), depending on how the property was financed and what the developer chose. Area median income is calculated by HUD for each metropolitan area and county. A household earning 60 percent AMI in rural Kansas might earn $36,000 a year; the same percentage in San Francisco might be $75,000. The property manager will ask for proof of income—usually recent pay stubs, tax returns, or a letter from your employer—to confirm you meet the limit.

Income limits are set by household size. A family of four has a higher limit than a single person. If your household income exceeds the limit when you apply, you will not be admitted to that property. If your income rises after you move in, the property may allow you to stay at the same rent, or may require you to leave when your lease ends. Rules vary by property and state.

How States Distribute Credits and What That Means for Availability

Congress allocates a total pool of LIHTC credits to each state based on population. States then run a competitive process—usually once a year—where developers submit proposals for new or renovated housing. A state housing finance agency scores each proposal on criteria like location, community need, developer experience, and long-term affordability. The highest-scoring projects receive credits; others do not.

This means the number of LIHTC units available in your area depends on how many projects your state funded that year and where they were built. Some states fund dozens of projects annually; others fund far fewer. A state might award credits for a 100-unit building in one city and nothing in another. There is no central waiting list or single application process. You find LIHTC housing by searching for specific properties in your area, then applying directly to the property manager, just as you would for any rental apartment.

Finding LIHTC Housing in Your Area

LIHTC properties are not always labeled as such in rental listings. Your best route is to contact your state or local housing finance agency and ask for a list of LIHTC properties currently accepting residents. Many states publish this list online; others will mail or email it to you. You can also call 211 (a free referral service) and ask for affordable housing in your area—they often know which properties are LIHTC-funded.

Once you have a list of properties, call each one and ask about income limits, current vacancies, and the application process. Bring proof of income, identification, and rental history. The application is the same as for any rental: the property manager will check your credit, verify your income, and contact previous landlords. LIHTC properties must follow fair housing laws and cannot discriminate based on race, color, national origin, religion, sex, familial status, or disability.

The Difference Between LIHTC and Other Housing Programs

LIHTC is often confused with other federal housing programs because they all aim to make housing more affordable. The key difference is how the money flows. Section 8 vouchers pay a portion of your rent directly to your landlord on your behalf. Public housing is owned and operated by a local housing authority. LIHTC is a tax incentive that makes it cheaper for a private developer to build or own affordable housing in the first place.

You can live in LIHTC housing and also receive a Section 8 voucher—the two are not mutually exclusive. Some LIHTC properties are reserved for people with vouchers; others accept anyone who meets the income limit. A property might be both LIHTC-funded and project-based Section 8, meaning the building received both types of subsidy. The rent you pay depends on the property's rules and your voucher amount, if you have one.

What Happens When the Compliance Period Ends

LIHTC properties must remain affordable for a minimum of 15 years from the date the building is placed in service. Many states require 30 years. After the compliance period ends, the owner is no longer required to keep rents low. Some owners do anyway, especially if the debt is paid off and operating costs are manageable. Others raise rents to market rate and the building becomes unaffordable to the original residents.

This is why advocates push for longer compliance periods and why some states have created programs to preserve LIHTC housing beyond the initial term. If you live in a LIHTC property approaching the end of its compliance period, the property manager should notify you of any planned rent increases. You may be able to move to another LIHTC property or explore other housing options before rents rise.

Frequently Asked Questions

Do I have to pay back the tax credit if I live in LIHTC housing?

No. The tax credit is claimed by the property owner or investor, not by you. You simply pay the reduced rent set by the property. There is no repayment obligation for tenants.

Can I be evicted from LIHTC housing if my income goes above the limit?

Rules vary by state and property. Some properties allow you to stay at the same rent even if your income rises. Others require you to leave when your lease ends. Ask the property manager about their income recertification policy before you move in.

Is LIHTC housing the same as Section 8 housing?

No. LIHTC is a tax credit for developers; Section 8 is a voucher program that pays landlords on behalf of tenants. A property can be both LIHTC-funded and accept Section 8 vouchers, but they are separate programs with different rules.

How do I know if a rental property is LIHTC-funded?

Call your state housing finance agency or local housing authority and ask for a list of LIHTC properties. You can also ask the property manager directly. They are required to disclose this information and to tell you the income limits for the building.

What if there are no LIHTC properties available in my area?

LIHTC availability depends on how many projects your state funded and where they were built. If none exist near you, explore other options: Section 8 vouchers, public housing, emergency rental assistance, or nonprofit housing programs in your area. Call 211 for a full list of programs available where you live.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.