A property’s low income housing tax credits (LIHTC) can be calculated by using a three-step process:

1. Determine the “eligible basis” (the total cost basis that is eligible for consideration in the calculation of the “qualified basis.”)

2. Calculate the “applicable fraction” and “qualified basis” (the percentage of the property that is dedicated to affordable housing, and the total cost basis that is eligible for credits based upon the applicable fraction.)

3. Calculate the “applicable percentage“, based upon the appropriate tax credit rates (9% and/or 4%), with adjustments made for the AFR (Applicable Federal Rate), plus any additional credits attributable to the “basis boost.”

Affordable housing becomes easier to understand once you have learned its lexicon. For a guide to common industry terminology, click here for our Affordable Housing – LIHTC glossary.


“Eligible basis” is the total amount of development cost that would be eligible for generating Section 42 tax credits if all of the housing units are used for low-income housing.

Costs that may be included in the LIHTC eligible basis must be depreciable. Eligible costs include all “hard” construction costs and most depreciable “soft” costs, e.g. architectural and engineering costs, allowable developer fees and contractor profit, and construction loan interest. Costs attributable to common areas, corridors, etc. are included. Offsite costs, such as streets and infrastructure that are built and dedicated to a municipality, are now included in eligible basis.

Non-depreciable costs are excluded from the calculation of LIHTC eligible basis. Examples of the costs excluded from eligible basis include: land, interest payable on permanent loans, insurance and property tax expenses incurred following construction completion, application fees and deposits to reserves. The cost of facilities that charge fees not included in the rent, such as the cost of constructing garages that charge a monthly fee, are also excluded from eligible basis.


“Qualified basis” is the amount of eligible basis that will be used to generate low income housing tax credits (LIHTC). The qualified basis is based upon the proportion of the property that will be used for affordable housing.

The “applicable fraction” is the percentage of a Section 42 property that is dedicated to serving low-income housing residents. The applicable fraction is the lesser of (a) affordable units as a percentage of total units (the “unit fraction”), or (b) low-income housing square footage as a percentage of total project square footage (the “floor space fraction”.)

The “qualified basis” is equal to the eligible basis, multiplied by the applicable fraction.

A property with all of its units used for affordable housing will have an applicable fraction of 100%, and its qualified basis will be equal to its eligible basis. A mixed-income property (a property with a combination of low-income and market-rate units) will have an applicable fraction of less than 100%, and a qualified basis below its eligible basis.


There are three credit rates used in calculating the low-income housing tax credit:

* A 9% annual credit is applied to eligible construction and “substantial” rehabilitation costs

* A 4% annual credit is applied to the acquisition cost of existing buildings to be rehabilitated

* If a project uses tax-exempt bond financing, a 4% annual credit is used for all of its eligible costs, including eligible construction and substantial rehabilitation costs.

An LIHTC property that consists solely of new construction and that does not use bond financing will qualify for the 9% annual credit. A property that is financed with tax-exempt bond financing will use only the 4% annual credit. A development that includes the purchase of an existing building or buildings for rehabilitation purposes and that does not use tax-exempt bond financing will use a combination of 4% and 9% annual credits.

Applicable Federal Rate (AFR)

The 9% and 4% annual credits are subject to adjustment based upon the Applicable Federal Rate. The result is called the “applicable percentage.” The applicable percentage is equal to the Applicable Federal Rate (AFR).

The AFR is reported monthly by the IRS for both the 9% and 4% credits. Click here for a table of recent AFR rates.

Various acts of legislation have temporarily fixed the 9% tax credit at a rate of 9% since July 2008. In December 2015, the 9% fixed rate became permanent; however, the 4% credit is still subject to adjustment by the AFR.

The applicable percentage is typically locked during the month that the building is placed in service, although the developer has an option of locking the rate on either the date of the LIHTC reservation or the date of the carryover allocation. Once locked, this applicable percentage will be fixed for the life of the credit.

Basis Boost

An additional credit bonus of up to 30% (“130% basis boost”) is available to those developments that are located in designated high-cost areas (referred to as “Difficult Development Areas” or DDAs) and in Qualified Census Tracts (QCTs). The Housing and Economic Recovery Act of 2008 granted additional latitude to state housing agencies in awarding the basis boost, and now allows these agencies to award the basis boost when they deem it necessary for improving the viability of a project. The basis boost is not available for the 4% acquisition credit.

Annual credit vs. total credit

Tax credits are generated for a period of 10 years, with Section 42 LIHTC delivery commencing as buildings are placed in service. Total tax credits generated over the lifetime of the investment will equal ten times the “annual credit” amount.

For information about Section 42 set asides, rent and income restrictions, click here for an introduction. To learn more about the specifics of calculating maximum LIHTC rents, click here for a more detailed explanation, including several examples.

For up-to-date national and local commercial real estate news, including the latest affordable housing and multifamily headlines, click here to read FastCRE.com.


The example below assumes two identical Section 42 LIHTC new construction projects, both with 100% of the housing units designated as affordable (low-income) units.


In this example, the 9% development is eligible for the basis boost; as noted, the 4% acquisition credit is not eligible for the basis boost and not all 9% projects receive a basis boost. It is worth noting that there are circumstances when a 9% tax credit project that is eligible for the basis boost may generate total credits that exceed the total development costs.

A LIHTC development that involves the substantial rehabilitation of existing buildings would use the 4% tax credit for the proportion of acquisition costs that is attributable to the buildings. Because land is not subject to depreciation, the proportion of acquisition cost that is attributable to land is excluded from the basis calculation and is not eligible for either 4% or 9% LIHTC.

Please do not hesitate to contact us for more information about our consulting and advisory services for real estate acquisition, asset management and tax credits, including the Low Income Housing Tax Credit (LIHTC) and Historic Tax Credit (HTC), as well as other real estate matters. Click here to learn more about our team.

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Image of calculator courtesy of Ken Funakoshi. Licensed under Creative Commons.