The LIHTC extended use period is the second half of a Low-Income Housing Tax Credit property’s affordability commitment. It begins the day after the 15-year compliance period ends and runs for at least another 15 years, producing a minimum 30-year total commitment under Internal Revenue Code Section 42.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit During those additional years the income limits, rent caps, and occupancy rules that governed the property while credits were being claimed stay fully in force, but the enforcement mechanism changes: credit recapture is no longer available, and the state housing agency and qualifying tenants rely instead on a restrictive covenant recorded against the property’s title.
Where the Extended Use Period Sits in the 30-Year Timeline
Developers claim LIHTC credits annually over a 10-year period once the units are placed in service. The compliance period, however, runs 15 taxable years starting with the first year of the credit period.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit Any drop in the building’s qualified low-income basis during those 15 years can trigger recapture of credits already claimed, plus interest at the federal overpayment rate, so financial exposure is highest in this first phase.
The extended use period picks up where the compliance period ends. Federal law sets its minimum length at 15 additional years, and some projects carry longer timelines because the state housing credit agency built a later end date into the original agreement. Whatever the total length, the obligations do not soften over time. Owners must continue meeting the same income and rent rules until the scheduled end date on the recorded agreement, regardless of what has happened in the local market.
The Recorded Agreement That Makes It Enforceable
No LIHTC credits are allowed unless an extended low-income housing commitment is in effect for the building.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit The commitment takes the form of a written agreement between the property owner and the state housing credit agency, and it is recorded as a restrictive covenant under state law against the property’s title. Because it runs with the land, any future buyer inherits the same affordability obligations. A sale does not clear the restrictions.
The statute also requires the agreement to give individuals who meet the building’s income limits the right to enforce the affordability requirements in state court.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit Current and former qualifying tenants can bring legal action if an owner attempts to convert units to market rate before the commitment expires. The state agency has its own enforcement authority. Together, these overlapping enforcement channels are what give the second 15 years real force once credit recapture is off the table.
What the Rules Still Require
The affordability requirements that continue through the extended use period revolve around three interrelated rules: who can live in the units, what they can be charged, and how the property responds when circumstances change.
The Set-Aside Election
Every owner selects a minimum set-aside election at the outset, and that choice is irrevocable. Under the 20-50 test, at least 20 percent of residential units must be rent-restricted and occupied by households earning 50 percent or less of area median gross income. Under the 40-60 test, at least 40 percent of units must be rent-restricted and occupied by households earning 60 percent or less of AMGI.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit
A third option, the average income test, was permanently added by the Consolidated Appropriations Act of 2018. At least 40 percent of units must be rent-restricted and occupied by households whose income does not exceed an owner-chosen designation for each unit. Designations range from 20 percent to 80 percent of AMGI in 10-percent increments, and the average across all designated units cannot exceed 60 percent.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit
Rent Caps and the Available Unit Rule
Rent on each qualifying unit cannot exceed 30 percent of the imputed income limitation for that unit. The imputed income limitation is based on the applicable AMI percentage and the number of bedrooms: a studio is calculated as if occupied by one person, and each separate bedroom adds 1.5 individuals to the assumed household size.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit Gross rent includes a utility allowance for tenant-paid utilities, so the tenant’s actual check is the cap minus that allowance. Section 8 voucher payments do not count toward gross rent, so a voucher tenant can occupy a LIHTC unit without the subsidy pushing rent over the cap.
When a sitting tenant’s income rises above 140 percent of the applicable income limit, the unit does not immediately fall out of compliance. The available unit rule requires the owner to rent the next comparable-sized vacant unit to a qualifying low-income household.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit Failing to do so causes the over-income tenant’s unit to lose its low-income status.
Full-Time Student Rule
Households composed entirely of full-time students generally cannot occupy LIHTC units. A person counts as a full-time student if they attended an educational institution for any part of five calendar months during the year, and those months need not be consecutive. The statute carves out several exceptions: single parents (who are not dependents of another individual) living with their children, married couples filing jointly, students receiving assistance under Title IV of the Social Security Act, former foster youth, and students enrolled in certain job training programs.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit Property managers verify student status at move-in and annually.
Enforcement Without Recapture
Once the compliance period ends, credit recapture is no longer available as a penalty. State Housing Finance Agencies continue reviewing tenant income certifications and lease files and conducting physical inspections to confirm buildings meet applicable condition standards.2Federal Register. Uniform Physical Condition Standards and Physical Inspection Requirements for Certain HUD Housing Owners still submit annual certifications.
When a violation surfaces during the extended use period, the recorded restrictive covenant gives the state agency standing to pursue legal enforcement, including actions for specific performance to compel continued compliance. Qualifying tenants have their own statutory right to sue in state court. Agencies can also bar noncompliant owners and their affiliates from future LIHTC allocations, which for developers who plan multiple projects often carries more weight than any single-property penalty.
How the Extended Use Period Can End Early
The default is that the extended use period runs its full scheduled term. Federal law provides two narrow exceptions.
The Qualified Contract Process
After the 14th year of the compliance period, an owner can submit a written request asking the state housing credit agency to find a buyer for the property.3eCFR. 26 CFR 1.42-18 – Qualified Contracts The agency has one year to present a qualified contract, meaning a bona fide purchase offer at a price set by a statutory formula. If the agency cannot produce a willing buyer at that price within the year, the extended use period terminates and the owner can eventually convert the property to market-rate housing.4U.S. Department of the Treasury. Housing Crisis in Focus: LIHTC Best Practices to Discourage Qualified Contracts and Keep Housing Affordable for Longer
The formula has two components. The non-low-income portion of the building is valued at fair market value. The low-income portion is calculated as the applicable fraction multiplied by the sum of outstanding mortgage debt, adjusted investor equity (original cash investment adjusted for inflation), and other capital contributions, minus all cash distributions made to owners.3eCFR. 26 CFR 1.42-18 – Qualified Contracts The result is often higher than the building’s actual market value as affordable housing, which makes it hard for the agency to find a buyer and effectively allows the owner to exit. If the agency does present a qualifying offer and the owner refuses it, the existing commitment stays in place.
Many state agencies now require new LIHTC applicants to waive the qualified contract option as a condition of receiving credits, and others deduct points from or disqualify future applications submitted by owners who have previously requested a qualified contract.4U.S. Department of the Treasury. Housing Crisis in Focus: LIHTC Best Practices to Discourage Qualified Contracts and Keep Housing Affordable for Longer Owners of older projects, and buyers considering LIHTC properties near the 14-year mark, should read the recorded agreement carefully to see whether the qualified contract option was waived.
Foreclosure or Deed in Lieu
The extended use period also terminates if the property is acquired through foreclosure or a deed in lieu of foreclosure, provided no buyer willing to maintain the low-income requirements comes forward within a reasonable period afterward.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit This exception exists because lenders would be reluctant to finance LIHTC projects if a foreclosure locked them into decades of affordability restrictions. Even so, the three-year tenant protections described below still apply.
Tenant Protections After Early Termination
When the extended use period ends early through either exception, federal law provides a three-year transition period for existing tenants. During those three years, the owner cannot evict or terminate the tenancy of any current low-income tenant except for good cause, and cannot raise the gross rent on any low-income unit beyond what Section 42 would otherwise permit.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit The protection covers every tenant living in a qualifying unit when the commitment ended.
After the three years expire, federal law imposes no further restrictions on the property. Some states have their own advance notice laws requiring owners to inform tenants one to three years before affordability restrictions expire, and these state protections vary. Tenants approaching the end of a LIHTC commitment should check their state’s rules for anything beyond the federal three-year floor.
The Nonprofit Right of First Refusal
Separate from the qualified contract process, federal law allows the extended use agreement to include a right of first refusal for qualified nonprofit organizations, government agencies, or tenants (in cooperative form) to purchase the property after the compliance period ends.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit The minimum purchase price under this provision is the outstanding principal on debt secured by the building (excluding debt taken on in the final five years) plus any taxes attributable to the sale. That figure is typically well below market value, which makes the right of first refusal a realistic path for mission-driven buyers to acquire the property and keep it affordable beyond the initial 30-year window. Including the provision in the original agreement does not affect the owner’s tax credits.
The right of first refusal and the qualified contract process operate independently, though many state agencies now condition new credits on waiver of the qualified contract option while encouraging or requiring the right of first refusal. For a tenant or community organization trying to understand what happens when a LIHTC property’s affordability period nears its end, the agreement’s language on both provisions is the place to start.