What Is the LIHTC 9% Credit and How Does It Work?

The LIHTC 9% credit is the competitively allocated version of the federal Low-Income Housing Tax Credit, and it is the largest federal subsidy available for building or substantially rehabilitating affordable rental housing. Created under Section 42 of the Internal Revenue Code in 1986, it works by giving corporate investors a dollar-for-dollar reduction in federal tax liability, claimed annually over ten years, in exchange for putting up-front equity into a rent-restricted apartment project. Developers rarely use the credits themselves. They sell the ten-year stream to an investor, take the cash, and build the deal with less debt so the rents can stay low.

For 2026, each state receives roughly $3.41 per resident in annual 9% credit authority, and applications routinely request two to four times what is available. Winning an allocation is the hard part. Everything else in the program flows from that fixed supply.

How the 9% Track Differs From the 4% Track

The LIHTC program has two rate tracks, and they fund different kinds of deals. The 9% credit is reserved for projects not financed with tax-exempt private activity bonds. Because it produces a larger annual subsidy, it can close bigger financing gaps, which is why it dominates ground-up construction in high-cost markets and deep-subsidy projects serving very low-income tenants.¹

If a project uses tax-exempt bonds covering at least 50% of the building’s aggregate basis (including land), it must use the 4% rate instead. Those 4% credits flow automatically with the bond issuance and do not require a competitive allocation, but the smaller annual rate usually means the project needs additional soft financing to work. A developer who wants the 9% rate cannot mix it with tax-exempt bond financing above that 50% threshold, unless the eligible basis is reduced by the amount of the subsidized financing.¹

How the Credit Amount Is Calculated

The annual credit is built from three numbers: eligible basis, applicable fraction, and the credit rate.

Eligible basis is the depreciable cost of the residential portion of the building. It includes construction or rehabilitation costs, common areas, and functionally related facilities. It excludes land, initial lease-up costs like advertising, and any non-residential commercial space.² Federal grants for the project reduce eligible basis dollar-for-dollar, but Section 8 Housing Choice Vouchers and certain public housing operating subsidies paid on behalf of tenants are explicitly excluded from that reduction.³

Multiply eligible basis by the applicable fraction and you get qualified basis. The applicable fraction is the smaller of two ratios: low-income units divided by total residential units, or low-income floor space divided by total residential floor space.⁴ A 100% affordable project has an applicable fraction of 100%, so qualified basis equals eligible basis.

Multiply qualified basis by 9%, and that is the annual credit. A project with $10 million in qualified basis generates $900,000 in credits each year for ten years, or $9 million total. The ten-year credit period begins in the year the building is placed in service, though the owner can make an irrevocable election to defer the start by one year.⁴

The 9% rate itself is a permanent statutory floor. Before 2008, the rate floated monthly with federal borrowing costs and was often below 9%. The Housing and Economic Recovery Act of 2008 imposed a temporary floor, and the PATH Act of 2015 made it permanent for competitively allocated credits.⁵ Developers can now underwrite deals knowing the rate will not slip below 9%.

The 130% Basis Boost

Projects in certain designated areas can increase their eligible basis to 130% of what it would otherwise be, which translates into up to 30% more annual credits. Two designations trigger it.

Difficult Development Areas are metropolitan zones and nonmetropolitan counties where construction, land, and utility costs are high relative to area median income. HUD ranks areas each year on a cost-to-income ratio and selects them until the designations cover 20% of the relevant population.⁶

Qualified Census Tracts are census tracts where at least 50% of households earn below 60% of area median income, or where the poverty rate is 25% or higher. QCTs within any metropolitan area cannot cover more than 20% of that area’s population.⁴

HUD publishes updated lists each year. A site just outside a designated boundary loses a significant chunk of equity, so verify eligibility before underwriting the boost.

How Credits Become Project Equity

Developers sell the ten-year credit stream to corporate investors, typically large banks and insurance companies, through syndication. The investor buys a limited partnership interest, receives the credits as its return, and delivers up-front cash equity that substitutes for conventional debt.

Pricing moves with tax law, investor appetite, and interest rates. In the fourth quarter of 2025, the average price paid per dollar of 9% credit was around 84 cents. A project generating $9 million in total credits at that price brings in roughly $7.5 million in equity. Less debt means lower required rents. When pricing drops even a few cents, the equity gap widens and previously feasible deals turn marginal.

Winning an Allocation

Congress caps the total 9% credits each state can award. The state housing credit ceiling is the greater of a per-capita amount multiplied by state population or a small-state minimum, both inflation-adjusted. For calendar years beginning after December 31, 2025, the statute further increases these amounts by a factor of 1.12.⁴ Unused ceiling from the prior year and returned credits from failed projects roll into the current pool.

State housing finance agencies typically see two to four times as many credits requested as available, and some rounds run more oversubscribed than that. Competition is what lets state agencies demand deeper affordability, longer restriction periods, and higher design standards than federal law alone requires.

What the Application Requires

Preparation starts well before the submission deadline. Core requirements include:

A third-party market study demonstrating demand for affordable units at the proposed location, using the methodology the agency prescribes.
Site control through a recorded deed, executed purchase option, or long-term ground lease.
Financing commitment letters from lenders and equity investors. Conditional letters are common at this stage, but agencies want evidence the project can close.
A detailed development budget with line items for construction, professional fees, reserves, and contingencies, benchmarked against per-unit cost standards.
Developer experience with similar projects, including compliance history and any IRS Form 8823 noncompliance filings on the existing portfolio.

Application fees vary by state and are generally nonrefundable. Missing documentation can disqualify an otherwise strong project.

QAP Scoring

Each state’s Qualified Allocation Plan sets the scoring system used to rank applications. Federal law requires every QAP to give preference to projects serving the lowest-income tenants, projects committed to the longest affordability periods, and projects in qualified census tracts that support a community revitalization plan.⁴ Beyond those mandates, states set their own weightings covering location, local housing needs, sponsor qualifications, special-needs populations, energy efficiency, and other factors, and priorities shift year to year. Reading the current QAP before designing the project is not optional if you want a competitive score.

Winners receive a reservation letter, which is a preliminary commitment. After the building is complete and occupied, the agency conducts a final cost certification and issues IRS Form 8609 for each building. Form 8609 is the document that lets the owner start claiming credits on the federal tax return.⁷

Deadlines After You Win

Most 9% projects cannot be built and placed in service in the same calendar year as the allocation. The developer requests a carryover allocation, which preserves the credit commitment while construction proceeds. Two hard deadlines then apply.

The 10% test: within 12 months of the carryover allocation date, the developer must have incurred costs exceeding 10% of the project’s reasonably expected basis. That usually means closing on the land and starting site work.⁷

The placed-in-service deadline: the building must be placed in service by the end of the second calendar year following the allocation year. Credits allocated in 2026 must produce a building ready for occupancy no later than December 31, 2028.

Miss either deadline and the credits return to the state pool. Extensions are possible in limited circumstances, like construction delays from a federally declared disaster, but they are not automatic. Failed 10% tests and missed placed-in-service dates are among the most common sources of returned credits in any given cycle.

Project Eligibility for the 9% Rate

The 9% credit is available for new construction and substantial rehabilitation. The IRS defines substantial rehabilitation as expenditures incurred during a 24-month period equal to or greater than the higher of an inflation-adjusted per-unit minimum (originally $6,000) or 20% of the building’s adjusted basis at the start of that period.¹ This is a “greater of” test, not “either/or.”

Acquisition costs of an existing building can be included in eligible basis only if the building was last placed in service at least ten years before acquisition, the buyer and seller are unrelated, and the acquisition is paired with a substantial rehabilitation.¹ The ten-year lookback stops repeat flipping.

Income, Rent, and Set-Aside Rules

Every LIHTC project must elect one of three minimum set-aside tests at the outset and hold to it for the entire affordability period. The election is locked in and cannot be changed later, even if the project would pass a different test.

20-50 test: at least 20% of units rented to households at or below 50% of Area Median Income.
40-60 test: at least 40% of units rented to households at or below 60% of AMI.
Average income test: at least 40% of units rent-restricted with income designations ranging from 20% to 80% of AMI, provided the average across designated units does not exceed 60%.⁴

Rents are capped at 30% of the imputed income limit for each unit’s bedroom size, and that cap is inclusive of a utility allowance. Where tenants pay their own utilities, the owner must subtract a locally determined utility allowance from the maximum gross rent to arrive at the actual rent charged.

The Full-Time Student Rule

A unit occupied entirely by full-time students does not count as a low-income unit, which can drag the applicable fraction down and cause compliance problems. Congress carved out five exceptions where full-time student households still qualify:

All adults are single parents with minor children, are not dependents of anyone else, and the children are claimed only by their parent.
All adults are married and eligible to file a joint return.
At least one member receives assistance under Title IV of the Social Security Act.
At least one member was previously in foster care under a state agency.
At least one member is enrolled in a federally assisted job training program.⁴

Property managers verify student status at move-in and at annual recertification. A household that qualified on move-in can fall out of compliance later if a member enrolls full-time and no exception applies.

The 15-Year Compliance Period and Recapture Risk

Once the building is placed in service, the owner enters a 15-year initial compliance period. During those years the IRS can recapture previously claimed credits if the building falls out of compliance. State agencies enforce through annual file audits and periodic physical inspections and are required to report noncompliance to the IRS.⁸

Common compliance failures: renting to over-income households without proper documentation, charging rents above the allowable maximum after utility allowances, letting units fall into uninhabitable condition, and letting the applicable fraction drop below the elected minimum set-aside. Annual reports go to both the IRS and the state monitoring agency.

Recapture is triggered when qualified basis decreases from one year to the next. The owner files IRS Form 8611 and repays a portion of previously claimed credits with interest.⁹ Qualified basis can drop because:

Units are no longer occupied by income-qualified tenants.
Units are no longer rent-restricted at the required levels.
Units are no longer suitable for occupancy.
The project falls below its elected minimum set-aside.
The owner’s amount at financial risk on the building is reduced.

If the building drops below the minimum set-aside entirely, 100% of the accelerated portion of all previously claimed credits is recaptured, and the owner cannot switch to a different set-aside test to cure the shortfall.⁹ Selling the building or an ownership interest during the compliance period also triggers recapture, unless the owner can show the building will reasonably continue to operate as a qualified low-income property for the rest of the period.

Year 15 and the Extended Use Period

After the 15-year compliance period ends, recapture risk disappears, but affordability restrictions do not. Federal law requires an additional 15-year extended use period, bringing the total commitment to 30 years.⁸ The state agency keeps enforcing income and rent restrictions, and annual compliance reporting continues.

Year 15 is also the typical exit point for the tax credit investor. The limited partner has received all ten years of credits plus several years of passive losses and has little reason to stay in the partnership. Many partnership agreements include a right of first refusal that lets certain parties buy the property at a below-market price. Federal law protects this: a building does not lose its credits because tenants in cooperative form, a resident management corporation, a qualified nonprofit, or a government agency holds a right to buy at a price equal to outstanding debt plus taxes attributable to the sale.⁴ Because that formula excludes the investor’s equity contribution, the resulting price often sits well below fair market value, which is how many LIHTC properties transfer to long-term nonprofit or public ownership after the initial cycle.

1
Internal Revenue Service. About the Rehabilitation Credit and Low-Income Housing Credit
2
Internal Revenue Service. IRC 42 Low-Income Housing Credit Audit Technique Guide – Part III Eligible Basis
3
eCFR. 26 CFR 1.42-16 – Eligible Basis Reduced by Federal Grants
4
Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit
5
Library of Congress. An Introduction to the Low-Income Housing Tax Credit
6
Federal Register. Statutorily Mandated Designation of Difficult Development Areas and Qualified Census Tracts for 2026
7
Internal Revenue Service. Instructions for Form 8609 (12/2025)
8
U.S. Department of Housing and Urban Development. What Happens to Low-Income Housing Tax Credit Properties at Year 15 and Beyond – Summary
9
Internal Revenue Service. Form 8611 – Recapture of Low-Income Housing Credit