LIHTC Explained: 20-50, 40-60 and Income Averaging Set-Asides
A low-income housing tax credit project must meet the 20-50, 40-60 or income averaging test and cap rent at 30% of the income limit for 30 years or more.
By Seayora Editorial Team · Published · Facts checked · 3 min read
Short answer: A low-income housing tax credit project must elect one minimum set-aside: at least 20% of units rent-restricted and occupied by households at or below 50% of area median income, at least 40% at or below 60%, or income averaging, where at least 40% of units have designated limits from 20% to 80% that average no more than 60%. Gross rent on a restricted unit cannot exceed 30% of its income limit. The compliance period is 15 years, and the extended use commitment adds at least 15 more. The 2025 tax law raised the state credit ceiling by 12% from 2026.
Key takeaways
- Pick one set-aside: 20-50, 40-60, or income averaging (designations from 20% to 80% averaging 60% or less).
- Gross rent on a restricted unit may not exceed 30% of the unit’s imputed income limit.
- Compliance period: 15 years; the extended use period runs at least 15 years beyond it.
- From 2026, state credit ceilings rise 12%, and some bond-financed buildings qualify at a 25% test.
What are the LIHTC minimum set-aside tests?
| Test | Requirement |
|---|---|
| 20-50 | 20% or more of residential units rent-restricted and occupied by households with income at or below 50% of area median gross income |
| 40-60 | 40% or more of units rent-restricted and occupied by households at or below 60% of area median gross income |
| Average income | 40% or more of units rent-restricted and occupied by households at or below the limit designated for each unit, in 10-point steps from 20% to 80%, with the designations averaging no more than 60% |
These come from 26 U.S.C. § 42(g). For the average income test, the share is 25% rather than 40% for certain New York City projects described in section 142(d)(6).
How is LIHTC rent calculated?
A unit is rent-restricted if its gross rent does not exceed 30% of the imputed income limitation that applies to it. Imputed income is based on unit size rather than on the household actually living there, and the limit used for a building cannot fall below the limit in effect when the building first counted toward the project’s qualification. Gross rent generally includes a utility allowance for tenant-paid utilities, so a rent increase and a utility allowance change have to be read together.
What happens when a tenant’s income rises?
A household that qualified at move-in does not make its unit noncompliant just because its income later rises. But once a household’s income goes above 140% of the applicable limit, the next available unit of comparable or smaller size in the building must be rented to a qualifying household; under the average income test, the 140% is measured against the greater of 60% of area median income or the unit’s designated limit.
How long must a LIHTC property stay affordable?
The compliance period is 15 taxable years from the first year of the credit period. The building must also carry an extended low-income housing commitment, and the extended use period ends no earlier than 15 years after the close of the compliance period, or a later date the state agency sets. If the extended use period ends early, for example after a foreclosure, existing low-income tenants still cannot be evicted without good cause or have their rents raised beyond what is allowed for three years.
What did the 2025 tax law change?
- For calendar years after 2025, each state’s housing credit ceiling is multiplied by 1.12.
- A building can qualify for the credit that comes with tax-exempt bond financing when 25% or more of its aggregate basis, rather than 50%, is financed by such bonds, if at least one of the bonds is part of an issue dated after December 31, 2025 and finances at least 5% of the basis.
See the housing choice voucher guide for the other major affordable housing program landlords work with.
Frequently asked questions
What does 60% AMI mean for LIHTC?
A household whose income is at or below 60% of the area median gross income, adjusted for family size. Under the 40-60 test, at least 40% of the units must be rented to such households at restricted rents.
How is maximum LIHTC rent set?
Gross rent, including a utility allowance for tenant-paid utilities, may not exceed 30% of the unit’s imputed income limitation.
How long is the LIHTC compliance period?
15 years, followed by an extended use period that runs at least 15 more years under the building’s extended use commitment.
Sources
- 26 U.S.C. § 42, Low-income housing credit, Legal Information Institute, Cornell Law School
How Seayora helps
Affordable certifications: Run tenant income certifications against HUD’s limits for each unit.
This article is general information, not tax advice. Tax rules change and your situation is your own, so confirm the treatment with a CPA or enrolled agent before you file.
How we write and check these guides: editorial standards.
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