Low-Income Housing Tax Credit (LIHTC) Rentals: Tenant and Landlord Rules

The Low-Income Housing Tax Credit program governs a substantial portion of the affordable rental housing stock across the United States, establishing a distinct legal and operational framework that differs significantly from conventional market-rate rentals. This page covers how LIHTC properties are structured, what rules apply to income qualification and rent limits, and how both landlords and tenants navigate compliance obligations under federal and state oversight. Understanding these rules matters because violations can result in credit recapture for property owners and loss of affordable housing for tenants who depend on these units.

Definition and scope

The Low-Income Housing Tax Credit (LIHTC) program, established under Section 42 of the Internal Revenue Code, is administered at the federal level by the Internal Revenue Service (IRS) and at the state level by state housing finance agencies (HFAs). The program provides tax credits to private developers who agree to rent a defined percentage of units to income-qualified households at restricted rents for a mandatory compliance period — typically 30 years under extended use agreements, though the initial credit period is 10 years and the initial compliance period is 15 years (IRS, Section 42).

LIHTC properties are not the same as Section 8 Housing Choice Voucher properties, though the two programs can overlap when a voucher holder rents an LIHTC unit. LIHTC operates through tax credit allocation to developers rather than direct rental subsidy to tenants. The U.S. Department of Housing and Urban Development (HUD) provides oversight guidance, and each state's HFA issues qualified allocation plans (QAPs) that determine how credits are distributed within the state.

Two primary project set-aside elections exist under Section 42:

  1. 20/50 test — At least 20% of units must be occupied by households earning 50% or less of the Area Median Income (AMI).
  2. 40/60 test — At least 40% of units must be occupied by households earning 60% or less of the AMI.

Some projects elect the Average Income Test (introduced by the Consolidated Appropriations Act of 2018), allowing a mix of AMI designations averaging to 60% across the project.

How it works

The LIHTC compliance structure operates in discrete phases that bind landlords and affect tenant eligibility continuously throughout the compliance period.

Phase 1 — Credit Allocation: A developer applies to the state HFA for a tax credit allocation. The state scores the application against its QAP, which weighs factors such as location, tenant population served, and amenity commitments. Credits are awarded on a competitive basis, subject to each state's per-capita allocation ceiling — set annually by the IRS (for 2024, the figure was the greater of $2.90 per capita or $3,390,000 per state, as published by the IRS in Revenue Procedure 2023-45).

Phase 2 — Development and Placed-in-Service: The developer constructs or rehabilitates the property and places it in service. The state HFA issues IRS Form 8609, authorizing the credit claim.

Phase 3 — Tenant Qualification: Before move-in, prospective tenants must certify household income through a Third-Party Verification process. Landlords are required to document income sources, count all household members, and verify that gross household income does not exceed the applicable AMI limit for the unit's designation. Reviewing tenant screening laws is relevant here, as LIHTC does not override state-level screening restrictions.

Phase 4 — Annual Recertification: Tenants typically recertify income annually (some projects receive an exemption after the first year under HUD's updated guidance). If a tenant's income rises above 140% of the applicable limit, the next available comparable unit must be rented to a qualifying household — but the over-income tenant is not automatically evicted.

Phase 5 — Monitoring and Reporting: The state HFA monitors compliance and reports findings to the IRS on Form 8823. A noncompliance finding can trigger credit recapture, meaning the owner repays previously claimed credits with interest.

Landlords operating LIHTC units must also comply with standard habitability standards and federal Fair Housing Act requirements, including reasonable accommodation obligations for tenants with disabilities.

Common scenarios

Scenario A — Income qualification at move-in. A prospective tenant earns $38,000 annually. The property is located in a metropolitan area where 60% AMI for a one-person household is $45,000. The tenant qualifies. If the same applicant earned $46,500, the landlord is required under Section 42 to deny tenancy for that unit designation.

Scenario B — Tenant income increases mid-tenancy. A household initially qualified at 50% AMI sees income rise to 75% AMI at annual recertification. The landlord does not terminate the lease; instead, the next available same-size unit must be offered to an income-qualifying household. The over-income tenant continues at the restricted rent until that obligation is resolved.

Scenario C — Rent limit compliance. LIHTC rents are calculated based on 30% of the applicable AMI income limit, adjusted for unit size by bedroom count. For example, a two-bedroom unit set at 60% AMI in an area where 60% AMI for a three-person household is $48,000 carries a maximum monthly gross rent of $1,200 ($48,000 × 30% ÷ 12). Landlords may not charge above this ceiling. Tenants paying utilities independently may have the gross rent ceiling reduced by a utility allowance set by the HFA or HUD.

Disputes over rent amounts relate directly to the rules covered in rent payment rules and rent control and stabilization laws, which can apply simultaneously with LIHTC rent ceilings in some jurisdictions.

Scenario D — Source of income discrimination. In states with source-of-income protections, a landlord managing an LIHTC property cannot refuse a tenant solely because they hold a housing voucher. This intersects with source of income discrimination statutes that operate independently of federal LIHTC rules.

Decision boundaries

The LIHTC framework creates specific compliance thresholds that function as hard boundaries — not flexible guidelines.

Rent ceiling vs. market rent: The LIHTC gross rent limit is a statutory ceiling. If market rents fall below the LIHTC ceiling, the market rate applies. If market rents exceed the ceiling, the ceiling governs. Landlords may not use lease structures such as side agreements or fees to collect amounts that effectively exceed the gross rent limit.

Income limits by AMI designation: Each unit in an LIHTC property carries a specific AMI designation (50%, 60%, 70%, 80% under the Average Income Test). A tenant qualifying for a 60% AMI unit does not automatically qualify for a 50% AMI unit in the same building; separate income calculations apply.

Extended use vs. initial compliance period: The 15-year initial compliance period and the 30-year extended use agreement are distinct. An owner who exits the program after year 15 through a qualified contract process may transition units — but state QAP requirements and extended use agreements frequently impose restrictions beyond the federal 15-year minimum. Tenants in units subject to extended use agreements retain the rent and income protections for the full agreement term.

LIHTC vs. HUD rental assistance programs: LIHTC does not provide a rental subsidy to tenants. Tenants pay the restricted rent directly. HUD project-based programs — such as Section 8 Project-Based Rental Assistance — involve a direct subsidy contract with HUD. Properties can layer both, in which case both sets of rules apply simultaneously, and the more restrictive requirement governs.

Eviction protections: Tenants in LIHTC units retain all standard eviction procedural protections under state law. The eviction process overview governs how a landlord proceeds for nonpayment or lease violations. LIHTC compliance does not grant tenants additional eviction immunity, nor does it authorize expedited eviction for over-income status.

Transfer and subletting: Standard LIHTC compliance requires that any occupying household be income-certified. Unauthorized subletting or assignment that places uncertified occupants in the unit creates a compliance risk for the owner, independent of the subletting and assignment rules applicable under state landlord-tenant law.

References

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