Eligible Basis in LIHTC: Inclusions, Exclusions, and the 130% Boost

Eligible basis in LIHTC is the total dollar amount of a residential building’s depreciable costs that qualifies for the Low-Income Housing Tax Credit under 26 U.S.C. § 42. It is the starting figure for every credit calculation in the program. Get it wrong, and every number downstream is wrong too. The figure feeds into the qualified basis, which is then multiplied by either the 9% or 4% applicable credit rate to produce annual credits over a ten-year period.

What Costs Count

Eligible basis consists of costs that are depreciable under the tax code and directly tied to the residential rental building itself. The IRS defines this primarily by reference to the depreciation rules in Sections 103 and 168 of the Internal Revenue Code, meaning any cost capitalized to the building’s adjusted basis can potentially qualify.¹ The figure is measured as of the close of the first taxable year of the credit period, so costs paid or incurred after that cutoff don’t count.

Hard Construction Costs

The largest chunk of eligible basis comes from the physical construction itself: materials, labor, plumbing, electrical, HVAC, and structural work for the residential portions of the building. These are straightforward inclusions as long as they relate to the residential rental units or common areas serving tenants.

Capitalized Soft Costs

Professional fees for architectural design, engineering, and construction-related legal work qualify when they are capitalized into the building’s cost rather than expensed. Construction-period interest on loans used to finance the build and insurance premiums during development similarly count. The test is whether the expense gets capitalized to the building under standard tax accounting rules.

In-Unit Appliances and Tenant Amenities

Personal property installed within residential units qualifies when it is part of a complete living accommodation. The IRS considers a “unit” to be a space with separate and complete facilities for living, sleeping, eating, cooking, and sanitation, so cooking ranges, refrigerators, and sinks are included.¹ Facilities that are functionally related and subordinate to the residential project also qualify: swimming pools, parking areas, recreational rooms, trash disposal equipment, heating and cooling systems, and units for on-site maintenance staff or resident managers.

Common Areas and Community Service Facilities

Common-area costs are included as long as the amenities are available to all residential tenants on a comparable basis and no separate fee is charged for access.¹ Community service facilities such as computer labs, childcare centers, or health clinics can also be included, but they are capped. For buildings placed in service after July 30, 2008, the cap is 25% of the first $15 million of eligible basis plus 10% of any basis above that amount. All community service facilities within a single project are treated as one facility for this limit.

Every asset included in eligible basis must remain in continuous use throughout the 15-year compliance period. If an appliance or amenity is removed and not replaced, eligible basis drops accordingly.

What Costs Are Excluded

Several categories of spending are permanently off-limits, and failing to strip them out is one of the most common audit findings.

Land

The purchase price of the land underneath the building is always excluded because land is not depreciable. When a developer buys land with existing improvements, the purchase price must be allocated between the land (excluded) and the improvements (potentially includable).¹

Syndication and Organizational Costs

The costs of putting together a tax credit partnership are entirely excluded. Syndication costs include offering memorandums, promotional materials, broker commissions, investor legal fees, and due diligence expenses. Organizational costs such as forming the partnership entity, drafting partnership agreements, and making regulatory filings are similarly excluded. Under Section 709 of the tax code, syndication costs are capital expenditures that cannot be expensed, amortized, or included in the depreciable basis of the property.¹

Permanent Financing Costs

Construction-period interest qualifies, but costs associated with permanent mortgage financing do not. Origination fees, discount points, and interest on permanent loans fall outside eligible basis. Construction financing is capitalized into the building’s cost; permanent loan costs are treated as separate financing expenses.

Federal Grants

Any portion of a grant funded with federal money must be subtracted from eligible basis, regardless of whether the developer includes the grant in gross income.² This prevents double-dipping. The reduction applies in the year the grant is received and carries forward for all remaining years of the compliance period.³

One important boundary: Section 8 rental assistance payments made on behalf of tenants are not treated as grants. Project-based Section 8 contracts that send payments directly to the building owner do not reduce eligible basis, nor do rental assistance payments under other HUD or USDA programs specifically excluded by Treasury regulations.³ Federal loans requiring repayment also do not trigger a basis reduction.

Other Excluded Items

Costs expensed under Section 179 cannot be included because they are not depreciated over time. Credit allocation fees paid to the state housing agency to secure the tax credit allocation are also excluded, along with off-site infrastructure work, post-construction insurance and property taxes, reserves, and working capital.

Mixed-Use Buildings

When a building contains both residential rental units and commercial space, the costs must be split. Only the portion attributable to the residential rental units goes into eligible basis. Ground-floor retail, office space leased to outside businesses, and any square footage not serving the tenants or the residential operation must be carved out. Allocation is typically based on the ratio of residential to total square footage, though some costs can be assigned directly to one use or the other based on invoices and plans.

The 130% Basis Boost

Projects in certain federally designated areas can increase their eligible basis by 30%, effectively multiplying it by 130%. The boost exists because building affordable housing in expensive or economically distressed neighborhoods costs more.²

Three categories of projects qualify:

Qualified Census Tracts (QCTs) are tracts designated by HUD where either 50% or more of households earn less than 60% of area median gross income, or the poverty rate is at least 25%.⁴
Difficult Development Areas (DDAs) are areas designated by HUD where construction, land, and utility costs are high relative to area median gross income. Metropolitan DDAs collectively cannot cover more than 20% of total metropolitan population nationwide, and the same 20% cap applies to nonmetropolitan DDAs.⁵
State agency designations. State housing credit agencies can designate specific buildings as needing the boost to be financially feasible, even if the building sits outside a QCT or DDA. The statute treats these buildings as if they were located in a DDA. This designation is not available for buildings financed with tax-exempt bonds under Section 42(h)(4).²

A project with $10 million in eligible basis located in a QCT would see that figure rise to $13 million before the applicable fraction and credit rate are applied. The boost operates only on depreciable costs already in eligible basis and does not change what categories of costs qualify.

Acquisition Basis and the 10-Year Rule

When a developer acquires an existing building rather than constructing a new one, the purchase price of the building (excluding land) can form a separate eligible basis for the acquisition credit. This acquisition basis is paired with the 4% credit rate. But the building must clear a hurdle: at least 10 years must have passed between the date the building was last placed in service (or substantially rehabilitated) and the date of acquisition.²

The 10-year rule prevents rapid flipping of LIHTC properties to generate new rounds of credits. Federally assisted buildings financed or operated under Section 8, certain FHA mortgage programs, or USDA rural housing programs are exempt from the waiting period. State-assisted buildings receiving comparable state-level housing support also qualify for the exemption. The Treasury Secretary can also waive the rule for buildings acquired from a failed bank or its receiver.²

Rehabilitation as a Separate Building

Rehabilitation spending on an existing building is treated as if it were a separate new building for credit purposes. A single acquisition can therefore generate two streams of eligible basis: one for the purchase price of the building and another for rehabilitation costs. The rehab basis qualifies for the higher 9% credit rate when it meets the statutory spending thresholds.²

To qualify, the rehabilitation spending must meet two conditions. First, the expenditures must benefit the low-income units or be allocable to them. Second, total spending within any 24-month period must equal or exceed the greater of:

20% of the building’s adjusted basis as of the start of that 24-month period (not counting depreciation already taken), or
A per-unit minimum that started at $6,000 per low-income unit and is adjusted annually for inflation for buildings placed in service after 2009.²

Whichever test produces the higher dollar amount is the one the project must satisfy. The per-unit threshold has risen from the $6,000 base through annual cost-of-living adjustments, so confirm the current-year figure with the state housing agency or a tax advisor before underwriting a rehab deal.

From Eligible Basis to Qualified Basis

Eligible basis on its own does not determine the credit amount. It must be converted into qualified basis by applying the applicable fraction, which measures how much of the building actually serves low-income tenants. The applicable fraction is the lower of two ratios:²

Unit fraction: the number of low-income units divided by total residential units.
Floor space fraction: total square footage of low-income units divided by total square footage of all residential units.

A building with 100 units where 90 are reserved for low-income tenants has a unit fraction of 90%. If those 90 units represent only 85% of total residential square footage because market-rate units are larger, the floor space fraction is 85% and controls. Qualified basis would then be 85% of eligible basis. A 100% affordable building avoids this issue since both fractions equal 100%.

Qualified basis equals eligible basis (after any 130% boost) multiplied by the applicable fraction. That number gets multiplied by the credit rate to produce the annual credit amount.

The 9% and 4% Credit Rates

The statute establishes two credit tiers, commonly called the 9% credit and the 4% credit, though the percentages the IRS publishes each month fluctuate with interest rates. The distinction determines whether a project receives roughly 70% or 30% of its qualified basis in total credits over the ten-year credit period.

The 9% credit (70% present value) applies to new construction and substantial rehabilitation that is not financed with tax-exempt bonds or other federal subsidies. Congress established a permanent 9% floor in 2008, so even when the IRS-calculated rate dips below 9%, the applicable percentage stays at 9%.²
The 4% credit (30% present value) applies to acquisition of existing buildings and to new construction or rehabilitation financed with tax-exempt private activity bonds. A permanent 4% floor was enacted in the Consolidated Appropriations Act of 2021.

Annual credit equals qualified basis multiplied by the applicable percentage. A project claiming the 9% credit on a qualified basis of $10 million generates $900,000 per year for ten years, or $9 million in total credits. Every dollar that gets included or excluded from eligible basis ripples through the entire capital stack.

Documentation and Recapture

State housing agencies require an independent cost certification prepared by a certified public accountant before issuing the final credit allocation. The CPA reviews invoices, payroll records, closing statements, and the general ledger to verify that every cost claimed as eligible basis is actually depreciable residential property. Misclassified costs caught at this stage are simply removed; costs caught later by the IRS trigger far worse consequences.

The developer uses the certified figures to complete IRS Form 8609, the Low-Income Housing Credit Allocation and Certification, which records the building’s eligible basis, qualified basis, and applicable credit percentage.⁶ Form 8609-A is then filed for each year of the 15-year compliance period to report ongoing compliance and compute that year’s credit.⁷

If qualified basis drops during any year of the 15-year compliance period compared to the prior year, the IRS claws back a portion of the credits already claimed. The recapture amount uses an accelerated-portion formula comparing what the investor actually received to what they would have received if credits had been spread evenly over 15 years instead of 10. Interest accrues on the recaptured amount for each prior year at the IRS overpayment rate, and no deduction is allowed for that interest.⁸ Common triggers include vacating low-income units, renting to over-income tenants without proper documentation, or removing a depreciable asset from the building without replacement.

1
Internal Revenue Service. IRC 42 Low-Income Housing Credit Audit Technique Guide – Part III Eligible Basis
2
Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit
3
eCFR. 26 CFR 1.42-16 – Eligible Basis Reduced by Federal Grants
4
Legal Information Institute. 26 USC 42 – Low-Income Housing Credit
5
Federal Register. Statutorily Mandated Designation of Difficult Development Areas and Qualified Census Tracts for 2026
6
Internal Revenue Service. About Form 8609, Low-Income Housing Credit Allocation and Certification
7
Internal Revenue Service. Instructions for Form 8609-A
8
Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit