Section 42 Low Income Housing Tax Credit (LIHTC) properties are restricted by the “minimum set aside” and Area Median Income (AMI).

LIHTC MINIMUM SET-ASIDE (20-50 vs. 40-60 vs. Income Averaging)

LIHTC properties must dedicate a minimum percentage of their housing units to affordable housing. Since the creation of the LIHTC program, developers have been able to choose from one of two setasides:

20-50 Test: A minimum of 20% of the units must be set aside for low-income households whose incomes do not exceed 50% of Area Median Income (AMI), or;

40-60 Test: A minimum of 40% of the units must be set aside for low-income households whose incomes do not exceed 60% of AMI.

(In New York City only, a 25-60 Test is used in place of the 40-60 option, with a minimum of 25% of the property’s units set aside for low-income households whose incomes do not exceed 60% of AMI.)

As a result of the 2018 Consolidated Appropriations Act, a third set-aside has been added:

Average Income Test (aka Income Averaging Test): A minimum of 40% of the units (25% in New York City) must be set aside for low-income households with set asides that do not exceed an average of 60% of Area Median Income (AMI). Individual units may have set asides of 20%, 30%, 40%, 50%, 60%, 70% or 80% of AMI.

LIHTC credits are allocated only to LIHTC rental units and their associated common area amenities. Therefore, a development that includes both low-income and market-rate units will produce fewer credits than would a comparable development that is devoted exclusively to low-income housing.

The ratio of affordable housing to the total development determines the “applicable fraction” used in calculating the amount of available LIHTC. Click here to learn more about how to calculate the amount of low income housing tax credits.


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.

Avoid the high cost of LIHTC compliance violations. TheoPRO can train your team members throughout the US to earn their HCCP (Housing Credit Certified Professional) and SHCM (Specialist in Housing Credit Management) accreditations. TheoPRO offers compliance training programs designed specifically for asset managers and property managers. Click here to learn more.


In practice, many LIHTC properties have most or all of their units dedicated to affordable housing, in excess of the minimum requirements. It has been commonplace for such properties to elect the 40-60 Test and to exceed that test’s 40% minimum unit requirement by a substantial margin. However, some states encourage the inclusion of market-rate units in LIHTC developments.

In addition to the federal set aside requirements, states may also (and frequently do) require or encourage the use of set asides that are less than 50% of AMI.

Units that are restricted by the LIHTC program include both maximum rent limits (a form of rent control) and maximum income limits on new residents. Click here to learn more about LIHTC income limits, rent limits and utility allowances.

WHAT IS LIHTC AREA MEDIAN INCOME (AMI)?

Area Median Income (AMI) is determined annually by HUD, the US Department of Housing and Urban Development. AMI is calculated for each Metropolitan Statistical Area (MSA) in the country, as well as for each county that is not located in an MSA. Click here for US Census maps that identify MSAs.

The LIHTC program uses AMI to determine both maximum household income limits and rents. AMI calculations vary depending upon the number of members in a household. Larger households have higher income limits to account for their higher costs of living. Except for full-time caregivers, all of the members of the household are included in determining the appropriate AMI amount.


Westmont Advisors is proud to partner with LIHTC compliance experts TheoPRO to offer development compliance services and Section 42 training programs for LIHTC professionals, including property managers, developers, asset managers, syndicators and government agencies. Training and other services are available throughout the United States. Click here to learn more.

For a complete listing of LIHTC income limits, Section 8 income limits, Fair Market Rents and other affordable housing data for every MSA and county in the United States, please click here to access Westmont’s LIHTC Affordable Housing Data Center.


Westmont and our partners at TheoPRO can serve your needs throughout the United States. 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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