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The Low-Income Housing Tax Credit (LIHTC): Defined And Explained

April 18, 2024 7-minute read

Author: Lauren Nowacki

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Housing can be expensive. When you make below the median income of your area, it can feel difficult to find a place to live that still allows you to afford all of your other living expenses. Years ago, the federal government saw the need for more affordable housing for low-income families. To make more of these properties available, the Low-Income Housing Tax Credit was created.

What Is The Low-Income Housing Tax Credit?

The Low-Income Housing Tax Credit (LIHTC) is a tax incentive for rental owners and developers who provide affordable housing for low-income residents. That means the rent they charge is considered affordable by those whose income falls below the median household income of the area.

The LIHTC, written into the Tax Reform Act of 1986, was created by Congress to get more affordable rental housing units out there and available to those in need. It provides federal funding for the new construction or rehabilitation of these types of rental properties. This tax credit encourages developers to invest in affordable housing over other investment opportunities.

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Who Can Take Advantage Of The Low-Income Housing Tax Credit Program?

Rental property owners and developers who provide affordable housing that meets the specific qualifications may qualify for the LIHTC program. Many types of properties are LIHTC-eligible, including single-family homes, apartment buildings, multifamily homes, townhouses and duplexes.

While low-income families don’t qualify for the tax credit, they can qualify to live in a LIHTC program property. They must apply for residence and meet certain requirements to qualify to live there.

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How To Qualify For The Low-Income Housing Tax Credit As An Owner Or Developer

The two main components that owners and developers must meet to qualify for the low-income housing tax credit involve income tests and gross rent tests.

Income Tests

Owners or developers must agree to meet an income test for tenants in one of three ways:

  • At least 20% of the units must be occupied by tenants with an income that’s 50% or less of the area’s median income (AMI). For example, if $50,000 is the AMI, 20% of the tenants must have an income of $25,000 or less.

  • At least 40% of the units must be occupied by tenants with an income that’s 60% or less of the AMI. For example, with a $50,000 AMI, 40% of the tenants must have an income of $30,000 or less.

  • At least 40% of the units must be occupied by tenants with an average income of no more than 60% of AMI and no units have tenants with an income greater than 80% of AMI. For example, with a $50,000 AMI, 40% of the tenants must have an average income of $30,000 or less and no tenant can have an income of more than $40,000.

Gross Rent Tests

Owners or developers receiving the LIHTC must also meet a gross rent test. This test requires that rent cannot be more than 30% of either 50% or 60% of the AMI.

For example, if the AMI is $50,000 then 50% of that is $25,000 and 60% is $30,000. The gross rent test states that rent cannot be more than 30% of those numbers. So, rent cannot exceed $625 per month ($7,500 per year) or $750 per month ($9,000 per year).

To earn and keep the tax credit, these properties must meet the income and gross rent tests for at least 15 years.

Since states allocate the tax credit through qualified allocation plans, properties that house very low-income families or provide affordable housing for a longer amount of time will get priority.

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Qualifications To Live In A Low-Income Housing Tax Credit Property

If you’re in need of affordable housing, an LIHTC property may be a good option for you. However, you’ll need to meet a few basic requirements and income eligibility as a single person or family. To qualify:

  • You must meet the income requirements of the specific property, which typically means you must make below a certain amount of money. Usually, you’ll need to earn less than 60% of the AMI. However, income requirements depend on the unit and the number of members in the household.

  • You can be a single person or a family with or without children.

  • There are no citizenship requirements to qualify.

Disqualifiers For The LIHTC Program

Even if you meet these conditions, you could still be denied. It’s important to know the common disqualifiers that make a person ineligible to enroll in the LIHTC program. These include:

  • Poor rental history: You may be asked to provide a list of past landlords, whom the property manager can contact. If you have issues with past rentals, including late or missing payments, multiple complaints or leaving on bad terms, you may not qualify.

  • Bad credit report: You’ll likely have your credit reviewed and, while you don’t need to have a high credit score to qualify, a credit history of late or missing payments and other red flags may disqualify you.

  • False information: Keep in mind that providing false information on a LIHTC program application could disqualify you and, more importantly, get you in trouble with the law.

  • Criminal record: A criminal record won’t automatically disqualify you most times, but it may make it more difficult to get housing. This depends on whether you were convicted, whether the crime was a felony and the type of criminal activity you were involved in.

How Do You Apply To Live In An LIHTC Program Property?

Follow these steps to apply for an affordable housing property that qualifies for the low-income housing tax credit.

1. Find An LIHTC Property

The first thing you’ll want to do is find a low-income housing unit. To start, you can search the LIHTC Database provided by the Department of Housing and Urban Development (HUD) or the LIHTC apartment search tool from Affordable Housing Online. It may be helpful to also reach out to a HUD-approved housing counseling agency at (888) 995-HOPE. The property must have an open waiting list or immediate availability for you to apply. If the waiting list is closed, you’ll have to keep checking back to see if the list reopens or choose another place. Wait times for these properties may be longer depending on the property and the area.

2. Obtain And Complete The Application

You’ll be able to obtain an application online or at the property’s rental office. Keep in mind, you may be required to pay an application fee.

The application will ask specific questions to determine if you’re eligible to live in the property. Most applications will ask for information about the following from each adult in your household:

  • Employment history

  • Income

  • Age

  • Rental history

  • Whether you’ve had previous evictions

  • Criminal record

  • Number of people in your household

  • References to verify the accuracy of the information

When filling out the application, make sure you follow the instructions carefully. If it’s filled out incorrectly or missing information, it may be returned to you or rejected. If you’re disabled and need someone to assist you in completing the application, you can get help by way of reasonable accommodation.

3. Submit The Application

You’ll likely need to submit the application directly to the property management company. Make sure you also follow the submission requirements carefully. If you can only apply online and you submit an application in person, it may get rejected simply because it wasn’t submitted online.

What To Do After Applying For An LIHTC Program Home

Once you apply to live in a place that’s part of the LIHTC program, you’ll likely enter a waiting period. You’ll need to wait for your application to process, which may take a week or more depending on the property. If the property has immediate availability, you’ll be notified if your application was accepted after processing. If the property has a waiting list and your application is accepted, you’ll be put on the list.

What To Do If You’re Put On A Waitlist

If you’re put on the waiting list, keep a record of your confirmation number and make note of your position on the list. You’ll want to keep your login information handy and routinely check if your position has changed. If any of your information changes while you’re on the waiting list, contact the property manager or housing office as soon as possible to update your application. You may receive notices throughout your time on the waiting list. You must respond to these immediately, following the instructions carefully, to have the best chance at being approved.

Once your application is accepted and you’re moved off the waiting list, you can move into your new affordable housing unit. Once you move in, you can stay in the unit as long as you follow the lease rules, even if your income increases.

What To Do If Your Application Is Denied

If your application is denied, you can appeal the decision. You’ll receive a denial letter that will include an explanation for the denial and information on how to appeal it. Typically, you’ll need to request a hearing with the housing program. During the hearing, a representative will review your situation and assess the validity of your appeal. If they find that you are eligible for the program, they’ll issue a written decision and update your case. Keep in mind that just because you win the appeal, you may still be denied for other reasons.

The Bottom Line: The LIHTC Program Makes Housing Accessible

The LIHTC program can be beneficial for rental owners, developers and people in need of affordable housing. It provides a tax credit for those renting out, building or rehabbing affordable housing units which, in turn, incentivizes them to offer more units. This helps make affordable housing more accessible to low-income families.

If you’re not interested in renting and wish to purchase a home of your own, it may be possible. Start your mortgage application online and begin exploring your mortgage options today. You can also give us a call at (833) 326-6018.

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Lauren Nowacki

Lauren is a Content Editor specializing in personal finance and the mortgage industry. Her writing focuses on reporting the best places to live in the U.S. based on certain interests and lifestyles. She has a B.A. in Communications from Alma College and has worked as a writer and editor for various publications in Philadelphia, Chicago and Metro Detroit.