HUD 223f Loans and LIHTC Credits

The LIHTC (Low-Income Housing Tax Credit) was created by the Tax Reform Act of 1986. According to HUD, it is “the most important resource for creating affordable housing in the United States today.” This federally authorized program gives both state and local agencies the authority to issue tax credits to non-profit and for-profit developers and investors for “the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households.” 

Tax credits equaling almost $8 billion are available for these purposes. By providing financing for the development of affordable rental housing, investors receive a reduction in their federal tax liability. Altogether, investors can claim these tax credits for 10 years. In addition, all projects must meet eligibility requirements for a minimum of 30 years after completion.

4% versus 9%

There are two uses of LIHTC, either constructing new rental buildings or renovating existing buildings. There are also two annual tax credits available for HUD multifamily financing. The credit received depends on the nature of the project:

  • 4% tax credit (30% subsidy): For acquisition of existing buildings for rehabilitation and new construction financed by tax-exempt bonds.

  • 9% tax credit (70% subsidy): Generally for new construction and substantial rehabilitation with no federal subsidies.


For 10 years, either a 4% or 9% tax credit can be claimed. The percentages are roughly equivalent to 4% or 9% of the project’s construction cost. The IRC (Internal Revenue Code) does not specify the tax credits (4% or 9%). Instead, the subsidy levels (30% and 70%) are stated in the IRC.

The LIHTC subsidizes a percentage of costs in a low-income unit project, either 30% or 70%. As a result, the program provides 30% of a project’s cost of construction (the 4% credit), and 70% a project’s cost of construction (the 9% credit). Since its inception, the rates have fluctuated based on market activity. The applicable tax credit rates have historically not actually been 4% and 9%. Instead, the rates for FHA multifamily financing have fluctuated in response to market interest movements, falling near 4% and 9%. A floor for the 9% tax credit was set in 2008, a rate below which the 9% credit cannot fall.

Further Reading: 

For a more extensive discussion of the LIHTC, read Mark P. Keightley’s report, Congressional Research Service.