A: The Low-Income Housing Tax Credit (LIHTC) is easily the most powerful funding mechanism for developing affordable rental housing in the United States. Created under the Tax Reform Act of 1986, LIHTC has helped finance millions of affordable housing units by leveraging private investment. Here’s how the program works, how it funds projects, and how credits are bought and sold.
How LIHTC Works
LIHTC is a federal tax credit designed to encourage private developers to build and maintain affordable housing. The program is administered by the Internal Revenue Service (IRS) and managed at the state level by housing finance agencies (HFAs), which allocate credits to developers through a competitive application process.
Developers that receive credits can sell them to investors to raise equity for their projects. In exchange, the developer must set aside a portion of the housing units for low-income tenants at restricted rental rates for a minimum of 15 years (though many agreements extend to 30 years or more).
There are two types of LIHTC:
9% Credit – Covers approximately 70% of a project’s eligible costs (excluding land). This credit is highly competitive and typically supports new construction.
4% Credit – Covers roughly 30% of eligible costs and is primarily used for the rehabilitation of existing affordable housing. This credit is easier to obtain but must be paired with tax-exempt bond financing.
Each state receives an annual allocation of 9% credits based on its population, while 4% credits are non-competitive and available to any project that qualifies for tax-exempt bond financing.
How Much of a Project Can LIHTC Fund?
While the LIHTC program is a powerful funding source, it generally does not cover the entire cost of a project. Instead, it provides a significant equity contribution—usually between 30% and 70% of the total development cost.
9% LIHTC projects: Typically fund 60% to 70% of the total development cost.
4% LIHTC projects: Usually fund 30% to 40% of the total cost.
The remainder of the funding often comes from:
Private loans from banks or other lenders.
State and local subsidies, including grants and soft loans.
Deferred developer fees, where developers reinvest a portion of their fees into the project.
Who Buys and Sells LIHTC Credits?
Since the tax credits reduce federal income tax liability over 10 years, they are attractive to investors—primarily large corporations and financial institutions looking to offset taxable income.
Buyers of LIHTC credits include:
Banks (to meet Community Reinvestment Act obligations).
Insurance companies and corporations with high tax liabilities.
Real estate investment firms looking for tax benefits.
Developers sell the tax credits to investors through LIHTC syndicators or directly to institutional investors. The price of credits varies but often ranges between $0.85 and $1.05 per dollar of credit, meaning that a $1 million tax credit could sell for $850,000 to $1.05 million in upfront equity.
Why LIHTC Is So Important
LIHTC is the largest source of affordable housing financing in the U.S., helping to develop over 3 million rental units since its inception. It encourages private investment in affordable housing, reduces reliance on public funding, and ensures long-term affordability for low-income families.
However, the program faces challenges, including rising construction costs, the complex application process, and limited availability of 9% credits. Policymakers continue to discuss ways to expand and strengthen the program to meet the growing demand for affordable housing.
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