Low-Income Housing Tax CreditLIHTC

The Low-Income Housing Tax Credit is the main federal tool for producing rent-restricted rental housing in the United States. State agencies award credits to selected projects. The developer then sells the credits to investors, usually corporations with tax bills to reduce, and the proceeds go into the project as equity that does not require the return a market investor would demand.

In exchange, the owner agrees to keep a share of units affordable to households below a set share of area median income for a long compliance period. Because rents are capped, the building produces less net operating income than a market-rate building of the same cost, which is why it needs the credit equity to fill the gap between what it costs and what its restricted rents can support.

The mechanism matters for anyone trying to understand affordable housing costs. LIHTC does not make a building cheaper to construct; it changes who pays. The construction cost is the same, or higher once compliance and layering of funding sources are counted, but part of it is covered by foregone federal tax revenue rather than by rent. Projects often stack LIHTC with other sources such as tax increment financing, tax abatements, and soft loans, each with its own rules.