The amount of a property's low income housing tax credits (LIHTC) can be calculated in 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."


"Eligible basis" is the total amount of development cost that is eligible for generating 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 property that is dedicated to serving low-income housing residents.   The applicable fraction is the lower of (a) affordable units as a percentage of total units, or (b) low-income housing square footage as a percentage of total project square footage.

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 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 entails the substantial rehabilitation of an existing building or buildings, and which 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.  

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.  

(As a result of the Housing and Economic Recovery Act of 2008, the applicable percentage for 9% LIHTC placed into service between July 30, 2008 and December 31, 2013 has been fixed at 9%.  The 4% LIHTC was not affected by this change in the law.)

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 to Develop 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 to developments that use tax-exempt bonds.

Annual credit vs. total credit
Tax credits are generated for a period of 10 years, with 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.


The example below assumes two identical LIHTC 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, projects financed with tax-exempt bonds are not eligible for the 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.

If using conventional financing (9% LIHTC) If using tax-exempt bonds
(4% LIHTC)
Total development costs $21,000,000 $21,000,000
Less: Ineligible costs, including land <1,000,000> <1,000,000>
Eligible basis (Total LIHTC eligible costs) 20,000,000 20,000,000
Applicable fraction 100% 100%
Qualified basis (Eligible basis X Applicable fraction) 20,000,000 20,000,000
Applicable percentage 9.00%* 3.25%*
Annual credit before basis boost 1,800,000 650,000
Basis boost (130%) 540,000 --
Annual credit after basis boost 2,340,000 650,000
Total credit (Annual credit X 10) 23,400,000 6,500,000
*The applicable percentage varies based upon the AFR.  Click here for a table of AFR rates.   The AFRs used in the example above are effective as of December 2013.

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

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