When it comes to financing affordable housing in the U.S., the Low-Income Housing Tax Credit (LIHTC) program is one of the most effective tools available. Administered by the Internal Revenue Service (IRS) and state housing finance agencies, LIHTC helps developers offset the cost of building or rehabilitating housing for low-income residents.
There are two types of credits under the LIHTC program: the 4% credit and the 9% credit. While both are designed to support affordable housing, they differ significantly in structure, funding potential, and use cases. For developers, investors, and compliance professionals, understanding the distinction is essential, not just for compliance, but for maximizing financial feasibility and community impact.
What Is LIHTC?
The Low-Income Housing Tax Credit is a federal incentive introduced through the Tax Reform Act of 1986. It provides a dollar-for-dollar tax credit over a 10-year period to investors in affordable rental housing.
To qualify, developers must meet income and rent restrictions, typically housing tenants earning 60% or less of the area median income (AMI). In exchange, developers receive tax credits they can sell to investors, generating equity to fund construction or rehabilitation.
To know more about how to calculate LIHTC rent limits, do read our in-depth blog.
Overview: 4% vs. 9% LIHTC
| Aspect | 4% LIHTC | 9% LIHTC |
| Credit Rate | ~4% (fixed since 2021) | ~9% (fixed) |
| Subsidy Level | Lower (covers ~30% of development costs) | Higher (covers ~70% of development costs) |
| Source of Allocation | Tax-exempt bond financing (automatic) | State allocation (competitive) |
| Use Case | Primarily rehab/preservation or new construction with bond financing | New construction or substantial rehab |
| Competition | Non-competitive | Highly competitive |
| Financing Cap | No limit on 4% deals (as long as 50%+ of development is funded by bonds) | Subject to state’s annual LIHTC cap |
Deep Dive: The 9% Credit
The 9% credit is often referred to as the “competitive” or “allocated” credit because developers must apply through a Qualified Allocation Plan (QAP) administered by state housing agencies. These applications are scored, and only the highest-ranking proposals receive credits.
Key Features:
- Covers a significant portion of the project’s costs, making it more viable for new construction in high-cost areas.
- Limited in supply due to a cap on how many credits a state can allocate each year.
- Typically used in neighborhoods needing revitalization or for hard-to-house populations (e.g., veterans, homeless individuals).
Pros:
- High subsidy makes projects financially easier to close.
- Encourages innovation and deeper affordability commitments.
Cons:
- Highly competitive.
- Complex application and compliance process.
Deep Dive: The 4% Credit
The 4% LIHTC is automatically available to projects that use 50% or more tax-exempt private activity bonds to finance development costs. This makes the credit non-competitive, but it also means lower subsidy.
Key Features:
- Often used for preservation of existing affordable housing, mixed-income developments, or supportive housing.
- Since 2021, the credit rate has been fixed at 4% (prior to that, it floated and was often lower).
- Can be combined with other sources like soft loans or deferred developer fees.
Pros:
- Predictable and non-competitive.
- Useful for developers looking to preserve existing stock or build without relying on competitive awards.
Cons:
- Lower subsidy often requires layering additional financing.
- Bond issuance introduces added complexity and compliance obligations.
Why the Difference Matters
For developers and compliance officers, the choice between 4% and 9% credits affects almost every aspect of project planning:
1. Funding Strategy
- 9% LIHTC projects often require fewer outside funding sources due to higher credit yield.
- 4% deals may need soft funds, state/local subsidies, or other layered financing.
2. Timeline
- Competitive 9% applications are time-sensitive and follow an annual cycle.
- 4% projects can begin as soon as bond financing and local approvals are secured.
3. Compliance & Reporting
- Both credits require long-term compliance (typically 15-year initial compliance + 15-year extended use).
- However, the stakes in a 9% deal are higher due to more oversight and larger investment amounts.
4. Scalability
- 4% LIHTC offers more flexibility for larger-scale developments or rehab portfolios.
- 9% is best suited for smaller, more targeted developments due to funding limits.
Real-World Scenarios
Scenario 1: Urban New Construction
A nonprofit developer wants to build a 60-unit apartment building in a high-cost urban area. Given land and construction prices, they apply for 9% credits to get a higher subsidy and reduce reliance on debt. They win the allocation through their state’s QAP.
Scenario 2: Preservation Project
A private developer acquires a 150-unit affordable housing complex built in the 1980s. They use tax-exempt bonds to finance the rehab and qualify for 4% LIHTC. They combine the credits with soft money from the state to cover gaps.
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Final Thoughts
While both 4% and 9% LIHTC credits serve the same overarching mission, to promote affordable housing, the differences in their structure, subsidy levels, and accessibility make them suited for different types of projects. Developers must weigh factors like cost, location, competition, and financing availability before deciding which credit to pursue.
For compliance professionals, understanding the nuances of both programs ensures that reporting, occupancy tracking, and income certifications remain in line with IRS and state housing agency requirements.
To know more about LIHTC vs section 8, do read our in-depth blog.
Whether you’re structuring your next deal or helping manage compliance, knowing the difference between the 4% and 9% LIHTC is more than technical, it’s foundational.
