The Low-Income Housing Tax Credit (LIHTC) program has been a cornerstone of
such as easing bond requirements and expanding available tax credits, have sparked renewed interest among developers, investors, and public housing authorities (PHAs) of all sizes.
This article explores the history and impact of LIHTC, why it’s essential for real estate professionals to understand, and how the 2025 tax reform bill is reshaping access to this critical program.
Established under the Tax Reform Act of 1986, LIHTC was designed to encourage private investment in affordable rental housing. Today, it remains the most important federal resource for creating and preserving affordable housing in the U.S., according to HUD’s Office of Policy Development and Research.
Nearly 40 years later, LIHTC continues to drive affordable housing development by offering federal tax credits to private investors. Since its inception, the program has helped finance over 4 million affordable rental homes, generating housing, jobs, and community stability.
Yet the need for affordable housing remains urgent. According to the National Low Income Housing Coalition’s The Gap report, the U.S. faces a shortage of 7.1 million rental homes that are affordable and available to extremely low-income renters. On average, only 35 affordable homes exist for every 100 extremely low-income households.
The LIHTC program offers two types of tax credits:
9% Credit: Covers a substantial portion of eligible costs for new construction projects without additional federal subsidies.
4% Credit: Typically used for rehabilitation or preservation projects financed with tax-exempt bonds.
Developers apply for LIHTC allocations through their state housing finance agency. Once awarded, developers sell the credits to investors, such as banks or corporations, in exchange for equity. This reduces the need for traditional debt financing and makes affordable housing projects more financially viable.
On July 4, President Donald J. Trump signed a tax reform bill introducing significant updates to the LIHTC program. Baker Tilly, a leading advisory, tax, and assurance firm and collaborator with HAI Group Online Training, hosted a webinar earlier this year to discuss the bill’s changes to LIHTC. In addition, we spoke with Baker Tilly staff to learn more about how the bill will affect public and affordable housing organizations, no matter their size.
Here are some of the key changes to LIHTC under the 2025 tax reform bill:
Permanent 12% increase in 9% credit allocations starting in 2026, giving states a larger pool of Low-Income Housing Tax Credits to award and enabling more new construction and rehabilitation projects to receive funding.
Lower bond financing threshold for 4% credits—from 50% to 25%— unlocking more developments that can qualify for tax-exempt bond financing and related credits.
Greater flexibility for public housing authorities (PHAs) to pursue multi-phase redevelopment projects—redeveloping large sites in stages—and to convert properties under HUD’s Rental Assistance Demonstration (RAD) program, which moves public housing to long-term Section 8 contracts to preserve affordability.
Improved equity pricing as investor confidence strengthens, allowing developers to sell tax credits to investors at higher prices. The added equity reduces reliance on loans and increases the upfront capital available for construction and rehabilitation projects, making affordable housing developments more financially feasible.
There are some challenges to watch, too:
Increased competition for credits, since each state receives a capped annual allocation of Low-Income Housing Tax Credits based on population and inflation adjustments. The 12% increase under the 2025 tax reform bill expands this pool but doesn’t eliminate the cap.
Potential revisions to state Qualified Allocation Plans (QAPs) as housing agencies adjust their scoring systems and priorities to manage heightened demand for credits.
Capacity constraints for smaller housing agencies, which may face challenges assembling financing or competing with larger developers for awards.
For asset managers, LIHTC properties present both opportunities and complexities. Understanding compliance periods, affordability restrictions, and investor expectations is essential for long-term portfolio performance.
As LIHTC-backed developments become more common, especially in mixed-income or mixed-finance projects, conventional real estate professionals are more likely to encounter them. Familiarity with the program can offer a competitive edge in navigating partnerships, acquisitions, and long-term asset strategies.
Despite its proven impact, the LIHTC program remains underused by many housing professionals, often due to limited access to practical training. To bridge that gap, HAI Group Online Training, in collaboration with Baker Tilly, developed The Fundamentals of the LIHTC Program—a self-paced online course designed to help housing professionals understand and apply the program effectively.
Whether you manage conventional multifamily properties or are exploring new development opportunities, a solid understanding of LIHTC is essential to expanding affordable housing options.
Explore additional housing-related tools, articles, and insights on the HAI Group Resource Center.