The 4% and 9% Low-Income Housing Tax Credits are two versions of the same federal program with very different economics. The 9% credit covers roughly 70% of a project’s eligible development costs and is awarded through a competitive state process. The 4% credit covers roughly 30% and comes automatically with qualifying tax-exempt bond financing. When developers compare 4% vs 9% LIHTC, the practical question is usually whether the project can survive a competitive scoring round for a deeper subsidy, or whether it works better with bond financing and a smaller credit stream on a predictable timeline.
Both credits flow as a dollar-for-dollar reduction in federal income tax over ten years. Both require the same affordability commitments. The differences that matter are how much equity each generates, how you qualify, and what kinds of projects each is built for.
Subsidy Depth and What Each Credit Funds
The 9% credit is the more powerful of the two. Because it covers around 70% of eligible costs at present value, it often carries a deal without additional federal subsidy layered on top. That is why 9% credits are the main tool for ground-up construction of affordable housing.1Office of the Law Revision Counsel. 26 U.S. Code 42 – Low-Income Housing Credit
The 4% credit generates less equity, so it’s typically used to acquire and rehabilitate existing buildings rather than build new ones. The remaining capital stack often includes soft loans, state housing trust funds, or other gap financing. The tradeoff is speed and certainty: with bond financing in hand, a developer can move on a predictable timeline instead of waiting for a competitive scoring cycle.
The equity gap between the two shows up plainly in the math. On a project with $5 million in qualified basis, a 4% rate generates $200,000 in annual credits, or $2 million over ten years. A 9% rate on the same basis generates $450,000 annually, or $4.5 million over ten years. That difference is the reason 9% credits are so heavily contested.
How You Qualify for Each Credit
The 9% Credit: Competitive Allocation
Each state receives a limited annual allocation of 9% credits based on population. For 2026, the per-capita multiplier is $3.05, with a minimum allocation of $3,530,000 for smaller states. State housing finance agencies distribute these credits through a competitive process governed by a Qualified Allocation Plan, and demand routinely outstrips supply.
Federal law requires each state’s plan to include selection criteria covering project location, housing needs, sponsor experience, energy efficiency, and tenant populations with special needs, among other factors. The plan must also give preference to projects serving the lowest-income tenants for the longest periods and to projects in Qualified Census Tracts that contribute to a broader community revitalization effort.2Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit Beyond those federal requirements, states have wide latitude. Some heavily weight projects near transit or strong school systems; others prioritize nonprofit sponsors or developments serving veterans and people experiencing homelessness. A strong 9% application can take months to prepare, and many solid projects lose simply because there aren’t enough credits to go around.
The 4% Credit: Bond-Linked and Non-Competitive
The 4% credit is designed for projects financed primarily with tax-exempt private activity bonds. When those bonds cover at least 50% of a building’s total basis, including the land, the project automatically qualifies for credits without competing for a state allocation.2Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit If you can secure the bond financing, you get the credits.
A significant change took effect for bonds issued after December 31, 2025. Projects can now qualify for automatic 4% credits if tax-exempt bonds finance just 25% of the building’s aggregate basis, as long as at least one bond in the issue is dated after that cutoff and finances at least 5% of aggregate basis. The original 50% threshold remains as an alternative path. The lower threshold expands access to 4% credits and lets developers rely less heavily on bond proceeds, potentially layering in more conventional debt.
The 4% credit itself is non-competitive, but the underlying bonds are constrained by each state’s private activity bond volume cap. For 2026, that cap is the greater of $135 per capita or $397,625,000 for smaller states. States allocate this limited bond authority across many competing uses, not just housing. In high-demand states, bond availability can be as much of a bottleneck as the 9% credit ceiling.
Why the Rates Are Called “4%” and “9%”
The names are informal. The actual applicable percentages are set monthly by the IRS based on federal borrowing rates. In early 2026, the floating 30% present-value rate hovered around 3.42–3.44%, and the 70% present-value rate around 7.98–8.04%. Without intervention, both rates would sometimes dip well below their nicknames.
Congress addressed this with permanent rate floors. The 9% floor was made permanent by the PATH Act of 2015, guaranteeing the applicable percentage for 70% present-value credits will never fall below 9%. The 4% floor was established permanently by the Consolidated Appropriations Act of 2021, ensuring the 30% present-value rate cannot drop below 4% for buildings placed in service after 2020.3Congress.gov. An Introduction to the Low-Income Housing Tax Credit Both floors are currently binding, so projects receive exactly 4% or 9% rather than the lower floating rates.
How the Credit Amount Is Calculated
The formula is the same for both credits. Only the applicable percentage differs.
Eligible basis is the portion of development costs that qualifies. It includes construction costs, site work, professional fees, and developer fees, but excludes land, marketing, syndication costs, partnership organizational expenses, permanent financing fees, and reserves.4Internal Revenue Service. IRC 42 Low Income Housing Credit ATG Part 3 It’s the depreciable portion of the building itself, not the business costs of putting the deal together.
Qualified basis is the eligible basis multiplied by the applicable fraction, which is the smaller of two ratios: the share of units reserved for low-income tenants, or the share of floor space those units represent.5Internal Revenue Service. IRC 42 Low-Income Housing Credit ATG Part 4 – Applicable Fraction A 100% low-income building has an applicable fraction of 1.0. A mixed-income project with half its units reserved has an applicable fraction of 0.5.
The annual credit is the qualified basis multiplied by 4% or 9%. That number then flows for ten years.
Basis Boosts: A Meaningful Differenceh2>
Projects in certain high-cost or high-poverty locations can increase eligible basis by 30%, which directly increases the annual credit. Two categories qualify automatically. Qualified Census Tracts are tracts where at least 50% of households earn below 60% of area median income or the poverty rate exceeds 25%. Difficult Development Areas are locations where land, construction, and utility costs are high relative to area incomes.6HUD USER. Qualified Census Tracts and Difficult Development Areas HUD updates both lists annually.
State housing agencies can also grant the 30% basis boost at their discretion for specific buildings. This discretionary boost is not available to projects financed with tax-exempt bonds, so it effectively applies only on the 9% side. That’s another structural advantage for competitive deals: even projects outside a QCT or DDA can pick up a boost if the state agency awards one.
Rules That Apply Equally to Both
Once you’re inside the program, most of the compliance framework doesn’t distinguish between 4% and 9% deals.
Every project must pass one of three income-targeting tests, chosen at the start of the compliance period and locked in for the life of the project:
- 20-50 test: at least 20% of units for tenants earning no more than 50% of area median gross income.
- 40-60 test: at least 40% of units for tenants earning no more than 60% of area median gross income.
- Average Income test: each unit is designated at a specific tier from 20% to 80% of area median income, with the project-wide average at or below 60%.7Internal Revenue Service. Rev. Rul. 2020-4
Rents on qualifying units are capped at 30% of the applicable income limitation for that unit, including a utility allowance. Section 8 voucher payments don’t count toward the rent limit.1Office of the Law Revision Counsel. 26 U.S. Code 42 – Low-Income Housing Credit Once a project’s rent floor is established, it cannot decrease even if area median incomes later drop.
The initial compliance period runs 15 years from the first year credits are claimed. During that time, credit recapture is the penalty for rule violations. The IRS claws back a portion of previously claimed credits, plus interest, when the qualified basis of a building decreases: units rented to over-income tenants, rents that exceed limits, units that become uninhabitable, or a set-aside test that stops being met. Selling the building also triggers recapture unless the new owner is reasonably expected to continue operating it as qualified low-income property for the remainder of the compliance period.8Internal Revenue Service. Recapture of Low-Income Housing Credit Casualty losses don’t trigger recapture as long as the property is restored within a reasonable time.
After the initial 15 years, a separate extended-use period of at least another 15 years keeps affordability restrictions in place, though IRS recapture risk ends.9U.S. Department of Housing and Urban Development. What Happens to Low-Income Housing Tax Credit Properties at Year 15 and Beyond – Summary
Choosing Between Them
For most developers the choice is dictated by the project. New construction of affordable housing usually needs 9% credits to pencil out because nothing else generates the equity to close the gap. Acquisition and rehab of existing buildings often works with 4% credits paired with tax-exempt bonds, and the non-competitive path means you can plan around a definite timeline rather than a scoring outcome.
Bond capacity, state QAP scoring priorities, and whether the site sits in a QCT or DDA all shape the answer. The 2026 reduction in the bond-financing threshold from 50% to 25% widens the 4% path meaningfully, making it a realistic option for projects that previously couldn’t carry that much bond debt. Where a site scores well against a state’s QAP and needs deep subsidy, 9% remains the target. Where the economics work with a smaller credit and reliable financing matters more than credit size, 4% is the tool.