Defining the Low-Income Housing Tax Credit (LIHTC) Program
The Low-Income Housing Tax Credit (LIHTC) is a federal program that provides tax incentives to private developers to encourage the construction or rehabilitation of affordable rental housing. Instead of a direct subsidy, the government issues tax credits that developers typically sell to investors to raise equity for their projects.
While the industry often uses the terms interchangeably, “Section 42 Housing” specifically refers to the portion of the Internal Revenue Code that established the LIHTC program. Though HUD provides the essential income data used to run the program, Section 42 is technically administered by the U.S. Treasury Department and the IRS.
Eligibility and Compliance under Section 42
To qualify for the credit, a property must meet specific occupancy and rent restriction requirements. Owners must ensure that a certain percentage of units are occupied by tenants whose incomes do not exceed 50% or 60% of the Area Median Income (AMI). These rent limits are designed to keep housing costs affordable, generally not exceeding 30% of the imputed income for the unit size.
Long-Term Affordability
Unlike some housing programs that may have shorter-term agreements, LIHTC properties generally require a minimum 15-year initial compliance period followed by an additional 15-year extended use period. This ensures the long-term availability of affordable housing within the community. During this time, owners must maintain detailed records and participate in regular compliance monitoring to ensure they remain in accordance with HUD and IRS standards.
What are Multifamily Tax Subsidy Projects (MTSPs)?
In regulatory language, HUD refers to LIHTC properties and multifamily projects financed with tax-exempt bonds (under Section 142) as Multifamily Tax Subsidy Projects (MTSPs). For tenants and most property managers, LIHTC, Section 42, and MTSP all refer to the same type of affordable housing framework where rents are capped based on area income levels.
Core Requirements: How Income Limits Determine Eligibility
Eligibility for Section 42 housing is not a “one size fits all” national standard. Instead, it is based on a household’s income relative to the Area Median Income (AMI) of their specific county or metropolitan area.
- AMI vs. MFI: While “Median Family Income” (MFI) and “AMI” are often used synonymously in conversation, AMI is the broader industry term for the benchmark HUD uses to determine affordability.
- Annual Calculations: HUD is responsible for calculating the MFI for every metropolitan and non-metropolitan county in the U.S. each year to ensure limits reflect current economic conditions.
How HUD Calculates Income Limits
HUD derives its income data primarily from the U.S. Census Bureau’s American Community Survey (ACS). Based on this data, HUD establishes three key thresholds used to determine eligibility across various programs, including Section 8 and Section 42 housing:
- Low-Income: Households with annual gross incomes at or below 80% of the Area Median Income (AMI).
- Very Low-Income: Households with incomes at or below 50% of the AMI.
- Extremely Low-Income: Households at or below 30% of the AMI.
Application of Income Limits in Tenant Selection
These limits are not just for eligibility, they also dictate how properties must prioritize vacancies. For example, many federally funded projects are required to reserve at least 40% of their available units for extremely low-income families.
Property managers must use HUD’s official income limits tool to ensure they are using the most current data for their specific geographic area. To maintain compliance, all applicants are required to submit verifiable proof of all income sources during the application and annual recertification processes.
Adjustments and Exceptions
To ensure stability and fairness, HUD applies several adjustments to these figures:
- Location Adjustments: Limits are adjusted for high-cost housing areas and state non-metropolitan income floors.
- Caps and Floors: HUD utilizes annual “caps” to prevent income limits from increasing by more than 10% in a single year, and “floors” to prevent limits from decreasing, providing predictability for developers and tenants.
- Family Size: Income limits increase as the number of household members increases to account for the higher cost of supporting a larger family.
How Maximum Rents Are Calculated for LIHTC Properties
The 30% of Income Standard
The fundamental rule of Section 42 is that a household’s rent (including a utility allowance) cannot exceed 30% of the imputed income limitation for that unit. It is crucial to note that rent is tied to the unit’s income designation (e.g., a 50% or 60% AMI unit), not the tenant’s actual household income.
Rent Calculation Formulas for LIHTC Units
The following formulas are used to derive maximum rents from Very Low-Income Limits (VLILs). Note: Official rates are set by State Housing Finance Agencies.
| Unit Size | Basis for 50% MFI Unit Rent |
| 0 Bedroom | 1-Person VLIL |
| 1 Bedroom | Average of 1-Person and 2-Person VLIL |
| 2 Bedroom | 3-Person VLIL |
| 3 Bedroom | Average of 4-Person and 5-Person VLIL |
| 4 Bedroom | 6-Person VLIL |
To calculate a 60% income limit or rent, you take 120% of the corresponding 50% VLIL. The maximum monthly rent is then calculated as 1/12 of 30% of that resulting figure.
The Role of State Housing Finance Agencies
While HUD provides the underlying data, the State Housing Finance Agency (SHFA) that awarded the tax credits is the final authority on maximum rental rates for a specific project. Always consult your relevant state agency for the most accurate, property-specific compliance data.
Special Considerations and Program Nuances
Rules for Properties in Rural Areas
Under the Housing and Economic Recovery Act (HERA), projects in rural areas may use the “Greatest Of” rule. This allows them to use the local AMI or the National Non-Metropolitan Median Income. This acts as a floor to ensure that development remains viable in areas where local incomes are exceptionally low.
Understanding Geographic Area Definitions
Income limits are highly localized and based on OMB-defined metropolitan areas. Sometimes, HUD identifies a HUD Metro FMR Area (HMFA). This is a specific portion of a larger metropolitan area that HUD treats as a distinct entity to ensure the income limits accurately reflect the local economy rather than a broad regional average.
Frequently Asked Questions (FAQs)
1. For Tenants: Will my rent go up if income limits increase?
HUD sets the maximum allowable rent. Individual landlords decide whether to actually raise the rent to that ceiling. While increases can happen when AMI rises, they are typically gradual. If your unit is part of a program where rent is tied directly to your specific income (like a Section 8 voucher), your portion of the rent will not change unless your income changes.
2. For Developers: How do income limit caps affect project viability?
HUD’s “cap-on-cap” policy limits annual income limit increases to 10%. While this can limit potential revenue growth in booming markets, HUD implements this to protect tenants from displacement, reduce statistical volatility from ACS data, and provide long-term planning stability for affordable housing portfolios.
3. Why don’t income limits always reflect recent economic changes?
There is a built-in time lag because the ACS data collection and processing take time. The data HUD uses to set 2025 or 2026 limits is often based on surveys conducted 1–2 years prior. Therefore, immediate shifts in the economy (like sudden inflation) may take a cycle or two to appear in official HUD tables.