Low-Income Housing Tax Credit Requirements: A Complete Guide

Understanding the Low-Income Housing Tax Credit Program

Housing affordability continues to be one of the largest challenges in the United States, especially in high-cost states like California.

To address this issue, Congress created the Low-Income Housing Tax Credit (LIHTC) program under the Tax Reform Act of 1986. The program encourages private developers and investors to build and preserve affordable rental housing for income-qualified households.

Today, LIHTC remains the primary federal program used to finance affordable rental housing nationwide.

What Is the Low-Income Housing Tax Credit (LIHTC)?

The LIHTC program provides federal tax credits to developers and investors who construct or rehabilitate rental housing that meets affordability requirements.

In exchange:

• A portion of the property’s units must be reserved for income-qualified households
• Rent levels must remain below market rates
• Properties must comply with federal and state regulatory requirements

Investors typically claim the tax credits over a 10-year period, while affordability restrictions usually remain in place for much longer.

4% vs. 9% LIHTC Credits (2026 Structure)

There are two primary types of LIHTC allocations.

9% Credits

9% credits are generally used for new construction projects.

Key characteristics include:

• Highly competitive application process
• Larger equity contribution to the project
• Limited annual allocation per state

4% Credits

4% credits are typically used in combination with tax-exempt bond financing.

They are often used for:

• Acquisition and rehabilitation projects
• Preservation of existing affordable housing

These credits generally provide smaller equity contributions compared to 9% credits but are more widely available.

In California, both credit types are administered by the California Tax Credit Allocation Committee (CTCAC).

Core LIHTC Requirements

To qualify for and maintain eligibility for LIHTC financing, properties must follow strict rules related to income limits, rent levels, and ongoing compliance.

1. Income Requirements

Tenants must meet income limits tied to Area Median Income (AMI).

Common minimum set-aside structures include:

• 20% of units reserved for households earning 50% of AMI
• 40% of units reserved for households earning 60% of AMI
• Income averaging model where the property-wide average cannot exceed 60% AMI and individual units may go up to 80% AMI

Income limits vary depending on:

• County
• Household size
• Annual HUD updates

Income eligibility must be verified at initial move-in.

Annual Recertifications (2026 Clarification)

Under federal updates following the Housing and Economic Recovery Act (HERA):

• Many 100% LIHTC properties do not require annual income recertification after move-in
• Properties with layered subsidies (such as HUD, PBV, or HOME funding) typically still require annual recertification
• State agencies may impose additional compliance reporting requirements

Income verification is always required before initial occupancy.

2. Rent Restrictions

Rent levels are based on Area Median Income limits, not the tenant’s current income after move-in.

Typically:

• Rent is calculated at roughly 30% of the designated AMI level

Example:

If a unit is designated at 60% AMI, the rent is calculated based on 60% of the area’s median income, not the tenant’s individual earnings.

Utility allowances must also be considered when calculating rent limits.

3. Compliance Period

LIHTC properties must maintain compliance for extended periods.

Typical requirements include:

• A 15-year federal compliance period
• An extended use period of at least an additional 15 years

In California, many LIHTC properties operate under extended use agreements lasting up to 55 years.

Non-compliance during the initial 15-year period may trigger tax credit recapture.

How LIHTC Allocation Works

Federal Allocation

The IRS allocates tax credits to each state based on population.

State Distribution

In California, the California Tax Credit Allocation Committee (CTCAC) distributes tax credits through a competitive scoring process.

Developers must demonstrate:

• Community need
• Financial feasibility
• Project design quality
• Long-term affordability

Projects are ranked based on public benefit and readiness.

Compliance and Oversight

LIHTC properties are subject to ongoing regulatory monitoring.

In California, oversight typically includes:

• CTCAC compliance monitoring
• Recorded regulatory agreements
• Extended use agreements
• Periodic file audits
• Physical property inspections

If non-compliance occurs, state agencies may file IRS Form 8823, which reports violations to the IRS.

Potential consequences include:

• Tax credit recapture
• Investor penalties
• Increased regulatory scrutiny

Professional compliance management is critical for LIHTC properties.

Student Eligibility Rules

Under Section 42 rules, households composed entirely of full-time students may not qualify unless they meet certain exceptions.

Common exceptions include:

• Married couples filing joint tax returns
• Single parents with dependent children
• Households receiving certain forms of public assistance

This is a common compliance area requiring careful documentation.

Benefits of the LIHTC Program

For Developers and Investors

• Federal tax credits over a 10-year period
• Structured financing for affordable housing development
• Predictable occupancy due to strong demand

For Tenants

• Below-market rents
• Stable housing costs
• Access to quality housing in high-cost areas

How to Apply for a LIHTC Apartment

Individuals seeking tax credit housing typically follow these steps:

1. Research Available Properties
   Search through local property management companies or housing agencies.
2. Confirm Income Eligibility
   Verify that household income falls within AMI limits.
3. Complete an application
   Provide personal and financial information.
4. Submit Documentation
   Documentation often includes:
   • Pay stubs
   • Tax returns
   • Bank statements
   • Identification
   • Rental history
5. Await Approval or Waitlist Placement

If no units are available, applicants may be placed on a waiting list.

The Bottom Line

The Low-Income Housing Tax Credit program remains the cornerstone of affordable housing development in the United States.

It provides:

• Financial incentives for developers and investors
• Affordable housing opportunities for income-qualified households
• Long-term housing stability for communities

However, LIHTC properties operate under complex federal and state compliance requirements. Proper management, documentation, and regulatory oversight are essential.

Beach Front Property Management has extensive experience managing LIHTC and affordable housing communities across Southern California.

Our team supports property owners with:

• Income certification
• Compliance monitoring
• Audit preparation
• Rent limit tracking
• Regulatory reporting
• Long-term asset management

Affordable housing management requires specialized knowledge and systems.

If you own or are developing a tax credit property and need experienced affordable housing management, contact BFPM to discuss your property strategy.