Tax Credits
Tax Credits
The Tax Credits domain tests Section 42 Low-Income Housing Tax Credit (LIHTC) compliance: income and rent limits, the minimum set-aside, applicable fraction, credit calculation, annual recertification, student rule, and the extended-use period. The exam favors file-level application over theory.
Core rules
- Meet the minimum set-aside: 20% of units at 50% AMI or 40% at 60% AMI, or a state-designated deep-income set-aside.
- Qualify tenants at move-in using the income limit for household size. After move-in, annual recertification is required, but a household over the income limit remains qualified unless income exceeds 140% of the current limit, triggering the next-available-unit rule.
- Maximum gross rent is 30% of the imputed income limit for the unit size, using 1.5 persons per bedroom, divided by 12; subtract the utility allowance.
- The applicable fraction is the lower of the unit fraction or floor-space fraction. Credit = eligible basis × applicable fraction × applicable credit percentage; the credit period is generally 10 years within a 15-year compliance period.
Worked example
A 2-bedroom unit has a 60% AMI income limit of $45,000 for a 3-person household (1.5 × 2 bedrooms). Maximum monthly gross rent = $45,000 × 0.30 ÷ 12 = $1,125. If the utility allowance is $125, maximum tenant rent is $1,000. A household earning $44,000 at move-in qualifies.
Traps
Setting rent from 30% of the tenant's actual income rather than the imputed limit; forgetting the utility allowance; miscounting the applicable fraction; missing the student rule; and late annual recertifications that create noncompliance.