What Is Tax Credit Housing and How Does It Work?

Tax credit housing is privately owned rental housing where the owner receives federal tax credits in exchange for keeping rents affordable and reserving units for lower-income households. The formal name is the Low-Income Housing Tax Credit (LIHTC) program, created by the Tax Reform Act of 1986 and governed by Section 42 of the Internal Revenue Code.¹ To rent one of these apartments, your household income generally needs to fall at or below a percentage of the area median income (AMI), most commonly 60 percent, and you apply directly to the property, not through a central agency.

Who Qualifies for a Tax Credit Apartment

Eligibility turns on Area Median Income, a figure the Department of Housing and Urban Development updates every year for each region and family size.² Each LIHTC project is built under one of three occupancy tests the developer chose when applying for credits:¹

The 20-50 test: at least 20 percent of units go to households earning 50 percent or less of AMI.
The 40-60 test: at least 40 percent of units go to households earning 60 percent or less of AMI.
The average income test, added in 2018: at least 40 percent of units go to qualifying households, individual units can be designated anywhere from 20 to 80 percent of AMI in ten-percent increments, and the average across restricted units cannot exceed 60 percent of AMI.

The 40-60 test is the most common in practice, so the income ceiling you will run into at most tax credit properties is 60 percent of AMI. Individual unit designations vary, though, and a single building using the average income test may include units set at 30 percent alongside units set at 70 or 80 percent. Ask the leasing office which designation applies to the unit you want.

Citizenship and Immigration Status

The federal LIHTC program does not require a Social Security number or U.S. citizenship to qualify. This is different from some other federal housing programs. Any household whose income fits the project’s limits can apply.

The Full-Time Student Rule

A household made up entirely of full-time students is generally ineligible. Federal law provides five exceptions that let an all-student household qualify anyway:¹

Single parents living with their minor children, where the parents are not claimed as dependents by anyone else and the children are only claimed by their parents.
Adults in the household who are all married to each other and entitled to file a joint tax return.
At least one household member receives assistance under Title IV of the Social Security Act, such as Temporary Assistance for Needy Families.
At least one household member was previously in the care of a state foster care agency.
At least one household member is enrolled in a job training program that receives federal, state, or local government funding.

If even one person in the household is not a full-time student, the rule does not apply at all. Property managers verify student status at move-in and every year after.

What Rent Actually Costs

Rent in a tax credit unit is capped at 30 percent of the imputed income limit for that unit, not 30 percent of what you personally earn.¹ Say a one-bedroom is designated at 60 percent of AMI and the monthly income limit for that designation is $2,800. The maximum gross rent is $840, whether your household earns $25,000 a year or $40,000. Two households in identical units in the same building pay the same rent even if their incomes are very different.

When you pay your own utilities, the landlord subtracts a utility allowance from the gross rent cap.¹ If the allowance is $100 and the cap is $840, the most the landlord can charge you in cash rent is $740. The allowance is an estimate based on average local costs, so the landlord does not owe you anything if your actual bills come in higher. Phone, cable, and internet are not part of the allowance.

Using a Section 8 Voucher

You can bring a Housing Choice Voucher to a tax credit apartment. When you do, the voucher payment made on your behalf does not count as part of the gross rent under LIHTC rules.¹ Your share is calculated under the voucher program’s rules, based on roughly 30 percent of your adjusted income.³ Combining the two can lower what you pay out of pocket compared to renting a tax credit unit on your own income. No federal law bars LIHTC landlords from accepting voucher holders, and a growing number of state and local laws prohibit source-of-income discrimination.

How to Find and Apply for a Unit

HUD maintains a searchable database of LIHTC properties at huduser.gov that lets you look up buildings by location, unit count, and income restrictions.⁴ Your state housing finance agency also publishes lists of tax credit properties, often in a searchable directory. You can also dial 211 to reach a local housing helpline.

Each property runs its own application and its own waitlist. There is no centralized application. Get the application form from the leasing office or management company, and apply to several properties at once if you can, since waitlists in many areas run months or years.

Documents You Will Need

Expect to document everyone who will live in the household. Requirements vary by property and by state housing finance agency, but a typical application asks for:

Proof of income for every adult: usually four to six consecutive pay stubs, Social Security or pension award letters, and any other income source documentation.
Government-issued photo ID and birth certificates for all household members.
Bank statements for checking, savings, and investment accounts, so management can count interest and dividends toward household income.
Written confirmation of student status from any school a household member attends.

There is one shortcut on assets. Under rules updated through the Housing Opportunity Through Modernization Act (HOTMA), if your household’s total assets are worth $52,787 or less, you can self-certify them with a signed statement instead of producing full bank documentation.⁵ The threshold adjusts each year for inflation. Some state agencies apply stricter documentation rules, so ask the property.

Screening and Waitlist Preferences

Compliance staff verify your income and household composition, usually by contacting your employers and financial institutions directly. Federal law does not set credit score requirements, so each property writes its own screening criteria. On criminal history, HUD guidance says blanket bans may violate the Fair Housing Act; managers should look at convictions rather than arrests, consider the type of offense and how long ago it happened, weigh evidence of rehabilitation, and apply the same standards to every applicant. You should have a chance to explain anything that turns up on a background check before a final decision.

Properties can put certain applicants ahead on the waitlist through preferences. Common categories include veterans, people with disabilities applying for accessible units, youth who aged out of foster care, and current residents of the local community. Ask the leasing office which preferences apply when you file.

Staying in Your Apartment

Annual Recertification

Once you move in, you generally have to recertify every year by submitting updated income and asset information so the property can confirm you still qualify. If you refuse to cooperate, that can be grounds to terminate your lease.

In buildings where every unit is designated as low-income, sometimes called 100-percent LIHTC properties, federal law waives the annual income recertification as long as no new resident moved in during the year with income above the applicable limit. Student status verification is still required every year, even in these buildings.

If Your Income Goes Up

A raise or a better job does not automatically cost you your apartment. Federal law addresses this directly.¹ As long as your income stays at or below 140 percent of your unit’s income limit, nothing changes. Your rent stays capped, the unit keeps its low-income status, and you stay put.

If your income goes above 140 percent of the limit, the “next available unit rule” applies.⁶ Whenever a comparable unit in the same building becomes vacant, the owner has to rent it to a new income-eligible tenant. As long as the owner does that, your unit keeps its low-income designation and you can stay. If the owner rents the next vacant unit to someone over the income limits instead, all comparable or larger over-income units in the building lose their status. That is a problem for the owner, not for you. Nothing in LIHTC law requires eviction because a tenant’s income rose.

Your Protections as a Tenant

Federal LIHTC law does not define “good cause” for eviction on its own, and the standard usually comes from state and local law. The extended-use agreement recorded against the property typically requires the owner to follow good-cause eviction rules for the full affordability period. At a minimum, a landlord cannot evict you just because your income increased. Many tax credit properties also participate in other federal programs, such as Section 8 project-based assistance or HOME, which carry their own good-cause eviction requirements.⁷

All tax credit properties are covered by federal fair housing law. A landlord cannot deny you or treat you differently because of race, color, religion, sex, national origin, familial status, or disability. In properties that also receive other federal housing funds, the Violence Against Women Act (VAWA) protects tenants from eviction or denial based on their status as a survivor of domestic violence, dating violence, sexual assault, or stalking.⁸

State housing finance agencies inspect tax credit properties and review their finances to make sure the buildings are maintained and rents stay within legal limits. If you think your property is not being maintained properly, or that you are being charged more than the allowed maximum, you can file a complaint with your state housing finance agency. The IRS can recapture the owner’s tax credits when a property falls out of compliance,¹ which gives owners a strong reason to fix problems when they come up.

1
Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit
2
HUD USER. Income Limits
3
U.S. Department of Housing and Urban Development. Units with Low-Income Housing Tax Credit Allocations Combined with Housing Choice Voucher Assistance
4
HUD USER. LIHTC Database Access
5
HUD USER. 2026 HUD Inflation-Adjusted Values
6
eCFR. 26 CFR 1.42-15 – Available Unit Rule
7
eCFR. Part 247 – Evictions from Certain Subsidized and HUD-Owned Projects
8
U.S. Department of Housing and Urban Development. Violence Against Women Act (VAWA)