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    Low-Income Housing Tax Credit (LIHTC): how it works and 2025 changes

    Also known as LIHTC, Housing Credit, Low Income Housing Tax Credit, Section 42 credit

    The Low-Income Housing Tax Credit (LIHTC), created in 1986, is the federal government's primary tool for developing affordable rental housing: developers get tax credits in exchange for keeping some units rent-restricted for lower-income households.[1] The 2025 reconciliation law permanently raised state credit allocations by 12% from 2026 and cut the bond-financing test for 4% credits from 50% to 25%.[2]

    Editor reviewedStrict sourcingUpdated WikiSocial welfare, Tech policy
    Key facts

    The Low-Income Housing Tax Credit (LIHTC, often called the Housing Credit) is a federal tax incentive for building and renovating affordable rental housing. CRS calls it the federal government’s primary policy tool for developing affordable rentals.[1] HUD calls it the most important resource for creating affordable housing in the country.[3] This page explains how it works and what changed in 2025. It is not tax, legal or investment advice.

    How the credit works

    A developer who agrees to rent some apartments at below-market rents to lower-income households can receive federal tax credits.[1] State housing agencies decide which projects get them.[4] Most developers cannot use the credits themselves. Instead they sell them to investors, mostly financial institutions, and use the money to build. The credits are claimed over 10 years once the building opens.[5] Raising money this way means less borrowing, which allows lower rents.

    Credits are claimed in equal amounts over 10 years once a building is placed in service. Developers typically sell the credit stream to outside investors, mostly financial institutions, for equity.[5] There are two credits. The 9% credit is competitive and drawn from each state’s annual allocation. The 4% credit is typically paired with tax-exempt private activity bonds and was designed to deliver up to a 30% subsidy.[6] To qualify, a project elects an income test: at least 20% of units for households at or below 50% of area median income (AMI), a 40-60 test, or income averaging. Under income averaging, at least 40% of units must average no more than 60% of AMI, with no tenant above 80%. Rents on restricted units cannot exceed 30% of the applicable income limit.[7]

    Changes in the 2025 tax law

    The FY2025 reconciliation law, P.L. 119-21, commonly called the One Big Beautiful Bill Act, made two lasting changes. It permanently raised states’ annual 9% allocation authority by 12% starting in 2026. It also lowered the share of a project that must be financed with tax-exempt bonds to qualify automatically for 4% credits, from 50% to 25%.[2] In 2026, states can allocate $3.416 per resident, with a minimum of $3,953,600 per state.[8]

    Before the law, LIHTC was estimated to cost about $14.4 billion a year in lost revenue. The changes were estimated to cost an additional $39 million in 2026, rising each year to $4.0 billion in 2034.[9]

    Debates

    LIHTC sits at the centre of a broader argument about whether building more homes is enough. Researchers at Harvard’s Joint Center for Housing Studies note that the supply of low-rent housing is shrinking and that market forces alone are unlikely to meet the need for deeply affordable homes.[10] Federal rental assistance reaches an estimated one in four eligible families.[11] The wider question of supply versus subsidy is covered in the housing supply and zoning debate.

    Finding LIHTC housing

    LIHTC subsidises buildings rather than paying tenants directly, so renters look for LIHTC properties instead of applying for a credit themselves.[1] Income and rent limits apply to the restricted units.[7] HUD publishes a database of LIHTC properties with their size, unit mix and location.[3] For how LIHTC compares with vouchers and public housing, see the rental and housing assistance guide.

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    Questions readers ask

    What is the Low-Income Housing Tax Credit?

    A federal tax credit, created by the Tax Reform Act of 1986, awarded to developers who agree to reserve a share of units as rent-restricted for lower-income households. It is the federal government's primary tool for developing affordable rental housing.[1]

    Who decides which projects get LIHTC?

    State housing finance agencies, which administer the program and award credits to developers. Awards of 9% credits are competitive and come from each state's annual allocation.[4][6]

    Who can live in an LIHTC apartment?

    Projects must meet an income test, for example at least 20% of units for households at or below 50% of area median income, or an income-averaging option, and must keep rents at or below 30% of the applicable income limit. Each property's own rules apply.[7]

    What did the 2025 tax law change for LIHTC?

    Starting in 2026, it permanently increased states' annual allocation authority by 12% and lowered the tax-exempt bond financing requirement for 4% credits from 50% to 25%.[2]

    How much does LIHTC cost?

    Before the 2025 law it was estimated to cost about $14.4 billion a year. The 2025 changes were estimated to reduce revenue by a further $39 million in 2026, rising to $4.0 billion in 2034.[9]

    How do I find an LIHTC property?

    HUD publishes a public LIHTC database with the size, unit mix and location of individual properties.[3]

    Sources

    · 11 claims from 4 publishers

    Each numbered claim is a statement we checked against the sources listed with it. Tap a number in the text to see its sources in place.

    1. [1]

      The Low-Income Housing Tax Credit, created by the Tax Reform Act of 1986, is the federal government's primary tool for developing affordable rental housing; developers get credits in exchange for reserving rent-restricted units for lower-income households. confirmedas of 2025-07-11

    2. [2]

      The 2025 reconciliation law (P.L. 119-21, the "One Big Beautiful Bill Act") permanently raised states' LIHTC allocation authority by 12% from 2026 and cut the tax-exempt bond financing test for 4% credits from 50% to 25%. confirmedas of 2026-09-25

    3. [3]

      HUD describes LIHTC as the most important resource for creating affordable housing in the US and maintains a public database of LIHTC properties. confirmedas of 2026-10-11

      • LIHTC Database · HUD User (HUD Office of Policy Development and Research) (retrieved 2026-10-11)
      • LIHTC Database · HUD User (HUD Office of Policy Development and Research) (retrieved 2026-10-11)
    4. [4]

      Although a federal tax incentive, LIHTC is mainly administered by state housing finance agencies, which award credits to developers. confirmedas of 2025-07-11

    5. [5]

      Developers claim the credits over 10 years once a property is placed in service, and usually sell them to outside investors, mostly financial institutions, for upfront equity. confirmedas of 2025-07-11

    6. [6]

      The "9%" credit is competitive and drawn from each state's annual allocation, while the "4%" credit is typically paired with tax-exempt bond financing and was designed to deliver up to a 30% subsidy. confirmedas of 2025-07-11

    7. [7]

      Projects must meet an income test, for example at least 20% of units for households at or below 50% of area median income, or use income averaging (at least 40% of units averaging no more than 60% of AMI, none above 80%), and keep rents at or below 30% of the applicable income limit. confirmedas of 2025-07-11

    8. [8]

      In 2026, states' LIHTC allocation authority is $3.416 per person, with a minimum state allocation of $3,953,600. confirmedas of 2026-09-25

    9. [9]

      Before the 2025 law, LIHTC was estimated to cost about $14.4 billion a year; the changes were estimated to reduce revenue by a further $39 million in 2026, rising to $4.0 billion in 2034. confirmedas of 2025-07-11

    10. [10]

      Harvard's Joint Center for Housing Studies, in The State of the Nation's Housing 2026, found nearly half of renter households cost burdened in 2024, slowing construction, record-low residential mobility, and a shrinking supply of low-rent housing that market forces alone are unlikely to replace. confirmedas of 2026-06-17

    11. [11]

      Nearly all federal housing assistance funding comes from annual appropriations; more than half of HUD's appropriations go to maintaining assistance for about 4.5 million households in the Housing Choice Voucher and Project-Based Rental Assistance programs, which together serve an estimated one in four eligible families. confirmedas of 2026-09-25

    Revision history (1)
    1. Page created.

    Created Oct 11, 2026. Last reviewed by an editor on Oct 11, 2026. Next scheduled review: Jan 15, 2027.

    Cite this page

    "Low-Income Housing Tax Credit (LIHTC): how it works and 2025 changes." ContentLora, updated Oct 11, 2026. https://contentlora.com/wiki/low-income-housing-tax-credit

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