A Complete Guide to LIHTC Income Limits and Tenant Qualification

The Low-Income Housing Tax Credit (LIHTC) program is one of the most impactful tools in providing affordable housing in the United States. By incentivizing private developers to create housing for low-income households, the program addresses a critical need for affordable housing. However, ensuring accuracy in LIHTC income limits and tenant qualification is vital for maintaining compliance and achieving the program’s intended benefits.

 

This guide will help property owners, managers, and stakeholders navigate the complexities of LIHTC regulations, focusing on income limits, tenant qualifications, and compliance best practices. 

Understanding LIHTC Income Limits

 

Income limits under the LIHTC program define tenant eligibility and set rent ceilings. These limits are based on the Area Median Gross Income (AMGI) and are determined annually by the US Department of Housing and Urban Development (HUD). Understanding these income limits ensures proper tenant qualification and project compliance. 

Types of Income Limits

 

LIHTC income limits vary based on geographic location, household size, and property-specific elections. Here are the key types:

 

1. Multifamily Tax Subsidy Project (MTSP) Limits: HUD publishes MTSP income limits ranging from 20% to 80% of AMGI, the default benchmarks for LIHTC properties.  
2. HERA Special Income Limits: Introduced by the 2008 Housing and Economic Recovery Act (HERA), these apply to projects placed in service before January 1, 2009, in areas with significant AMGI drops. 
3. National Non-Metropolitan Limits:  For rural LIHTC projects, owners can use either the MTSP or National Non-Metro limits, depending on which is more favorable. 
4. Hold Harmless Provision: Protect existing LIHTC properties from income limit reductions even when AMGI drops.

Calculating Additional Income Levels

 

In properties using the Average Income Test, additional income levels can be calculated from HUD’s published 50% limits. For instance:

 

• 20% AMGI = 50% AMGI x 0.4 

• 30% AMGI = 50% AMGI x 0.6 

• 70% AMGI = 50% AMGI x 1.4 

These calculations provide flexibility in structuring tenant eligibility requirements. 

Rent Limits

 

Rent limits for LIHTC units are based on 30% of the applicable income limit for the unit size. They include tenant-paid utilities and are adjusted annually to reflect changes in AMGI.

For example: 

The monthly rent cap for a three-person household with an income limit of $45,000 is $1,125 ($45,000 x 0.3 ÷ 12). 

Tenant Qualification Criteria

 

Tenant qualification ensures that only eligible households occupy LIHTC units. This process includes verifying income, monitoring household composition, and complying with the student rule.

 

Income Certification

 

Tenant income certification is a key step in determining eligibility. Here’s how it works:

 

• Initial Certification 

• At move-in, tenants must certify their income for the next 12 months. 

• Documentation includes pay stubs, employer letters, and asset declarations. 

• Annual Recertification 

• For mixed-income properties, annual recertification ensures tenants remain income-qualified or triggers the “Next Available Unit Rule.” 

• 100% LIHTC properties are exempt from annual income recertifications. 

   

Student Rule Compliance

 

The LIHTC program prohibits leasing to households entirely comprised of full-time students unless they meet certain exceptions. These exceptions include:

 

• Single parents with dependents. 

• Married students are eligible to file joint tax returns. 

• Students receiving Title IV Social Security benefits. 

Annual student status verification is mandatory to maintain compliance.
 

Over-Income Tenants

 

If a tenant’s income exceeds 140% of the applicable limit after move-in, the “Next Available Unit Rule” applies. This rule ensures that the next available comparable unit is rented to an income-qualified household, preserving the project’s compliance. 

Rent Calculations and Utility Allowances

 

Accurate rent calculations and proper utility allowances are central to compliance with LIHTC regulations. These ensure that rent limits are not exceeded and tenants are not overburdened.

 

Rent Calculations

 

Rent for LIHTC units is capped at 30% of the applicable income limit, adjusted for household size and unit type. The calculation assumes a standard occupancy ratio of 1.5 persons per bedroom.  

For example: 

A two-bedroom unit is calculated based on a three-person household. If the income limit for three people is $45,000 annually, the maximum monthly rent is $1,125.
 

Utility Allowances

 

Gross rent includes tenant-paid utilities, such as gas, electricity, and water. These allowances must be updated annually using HUD-approved methods, including:

 

• Public Housing Authority (PHA) schedules. 

• Utility company estimates. 

• Project-specific energy consumption models.

Failure to update utility allowances can result in non-compliance with rent restrictions. 

Compliance Best Practices

 

Compliance with LIHTC regulations is essential for avoiding penalties and safeguarding tax credits. Below are some best practices to streamline the process:

 

• Stay Updated with HUD Guidelines: HUD updates income and rent limits annually. Owners and property managers should monitor these updates and implement changes promptly. 
• Maintain Comprehensive Documentation: Proper documentation reduces the risk of non-compliance. Detailed tenant files should include the following: 

• Income verifications. 

• Student certifications. 

• Lease agreements. 

• Conduct Regular Recertifications: Annual income and student status recertifications for properties with mixed-income designations ensure ongoing compliance with LIHTC rules. 
• Use Technology for Efficiency: Property management software can automate tenant certifications, track recertifications, and flag potential compliance issues. 
• Consult Experts When Doubtful: Engage housing finance agencies or LIHTC advisors to address specific compliance questions or challenges. 

Common Compliance Pitfalls to Avoid

 

Compliance with LIHTC regulations requires careful attention to detail and proactive management. Here are some common pitfalls and strategies to avoid them: 

 

1. Miscalculating Household Income: Accurately project tenant income for the next 12 months using current data and include all income sources. Missing or underestimating income sources can lead to non-compliance. 
2. Overlooking Student Status: All tenants must complete annual student certifications. Failing to verify this information can result in disqualified units and potential penalties. 
3. Delayed Utility Allowance Updates: Utility allowances must be updated annually to reflect cost changes. Delays in these updates can lead to overcharging tenants and non-compliance. 
4. Inconsistent Application of Rules: LIHTC rules must be applied uniformly across all tenants. Any perceived inconsistency may result in fair housing violations and damage to a property’s compliance record. 
5. Lack of Proper Documentation: Maintain thorough records for tenant income, student status, and rent calculations. Missing documentation often results in findings of non-compliance during audits.
   

Conclusion

 

The LIHTC program, therefore, serves as a basis for solving the affordable housing issue in the US. Success depends on the income and tenant qualification processes and compliance rules. Property owners and managers of such projects shall be able to ensure that projects are compliant while offering much-needed housing to low-income families by availing themselves of the best practices or avoiding common mistakes. These mechanisms guarantee tax credits and uphold the program’s sense of purposeful development of sustainable, stable communities.