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How Does the Low-Income Housing Tax Credit Work?

This tax credit provides builders money to create affordable housing.

BY JEAN MURRAY  Updated June 12, 2019

The Low-Income Housing Tax Credit is a tax credit for real estate developers and investors who make their properties available as affordable housing for low-income Americans. It’s paid for by the federal government and administered by the states, according to their own affordable housing needs. Since the program’s inception, nearly 3 million affordable housing units have been constructed with the help of the tax credit.

Why a Tax Credit?

Tax credits and deductions reduce taxes for businesses and investors. Tax credits are used as incentives for businesses to do something. Most tax credits are for individual business owners. For example, a business can get a work opportunity tax credit for hiring new employees who live in certain areas or who have specific “barriers to employment.”

What Is the Low-Income Housing Tax Credit?

The LIHTC gives real estate investors and developers an incentive to build or renovate buildings to increase the amount of affordable housing for low-income Americans. The program was created by federal law in 1986 (The Tax Reform Act of 1986), and it’s administered by the IRS. You may see an LIHTC credit called a “Section 42” tax credit because it’s based on Section 42 of the federal tax law. According to the Urban Institute, the process for allocating tax credits competitively is guided by federal regulation, uses federal dollars, and is controlled by states.

What Is Affordable Housing? What’s Subsidized Housing?

The simple answer is that affordable housing doesn’t cost more than 30% of median income in a specifically designated area (called AMI). The LIHTC focuses on rental properties as affordable housing. Affordable housing is sometimes referred to as subsidized housing, because low-income individuals may qualify to receive subsidies to help them afford a home. Section 8 housing is one type of subsidized housing.

How Does the Low-Income Housing Tax Credit Work?


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