Low-Income Housing Tax Credit Compliance: The New LIHTC Rules to Know

The Low-Income Housing Tax Credit (LIHTC) program remains the cornerstone of affordable housing development in the United States, supporting owners, developers, and nonprofit sponsors across a wide range of project types.

While the program’s fundamentals haven’t changed, recent legislative developments — most notably the One Big Beautiful Bill Act (OBBBA) — are reshaping how projects are financed and, in turn, how compliance risk should be evaluated across the life of a project’s development.

Understanding both long-standing LIHTC compliance requirements and how recent changes may influence deal structures is critical for owners, developers, and nonprofit sponsors planning for 2026 and beyond.

Core Low-Income Housing Tax Credit compliance fundamentals

LIHTC compliance is designed to help affordable housing remain available to income-qualified households for the required compliance and extended use periods. Key compliance areas continue to include:

Income and rent restrictions

Units must be leased to households meeting applicable income limits, with rents calculated according to program rules and updated annually.

Unit set-asides and applicable fraction

Projects must maintain required minimum set-asides and verify the applicable fraction is met throughout the compliance period.

Tenant eligibility and documentation

Proper tenant income certification, record retention, and recertification requirements remain in effect.

Placed-in-service timing

The placed-in-service date triggers the start of the credit period and ongoing compliance obligations.

Ongoing monitoring and reporting

Owners should expect regular compliance monitoring by allocating agencies and maintain systems to support accurate and timely reporting.

How the One Big Beautiful Bill Act changes LIHTC compliance

Signed into law in July 2025, OBBBA introduced permanent changes to the LIHTC program expanding capacity and flexibility. Two provisions in particular are expected to significantly increase LIHTC activity beginning in 2026.

First, the legislation permanently expanded the pool of 9% LIHTC credits states can award each year to 12%. This expansion may result in increased application volume and heightened competition, placing greater emphasis on readiness, documentation, and post-award compliance planning.

Second, and more significantly for many markets, OBBBA permanently reduced the tax-exempt bond financing threshold for 4% LIHTC projects from 50% to 25% of aggregate basis for properties placed in service after December 31, 2025.

This change is expected to unlock a larger number of bond-financed LIHTC developments, particularly in states constrained by private activity bond volume cap.

Compliance implications of increased affordable housing construction volume

While these changes create meaningful opportunities to expand affordable housing production, they also introduce new compliance considerations:

More complex capital stacks

As bond-financed 4% deals become more common, owners should expect additional layers of regulatory oversight that can affect timing, documentation, and reporting.

Heightened focus on placed-in-service accuracy

With more projects moving through construction and lease-up simultaneously, errors around placed-in-service dates or unit qualification can create downstream compliance risk.

Operational readiness

Increased deal flow underscores the importance of having systems, controls, and experienced advisors in place before credits are claimed.

Income averaging and the evolving cliff risk

In parallel with these legislative changes, the IRS issued final regulations in September 2025 clarifying compliance rules for projects using the Average Income Test (AIT).

These rules significantly reduce the prior cliff effect, where a single noncompliant unit could jeopardize a project’s minimum set-aside, by allowing owners to maintain a qualified group of units continuing to meet average income requirements.

While this guidance provides meaningful relief, it also increases expectations around documentation, unit designation tracking, and coordination with state housing agencies — making strong compliance systems essential.

HOTMA: Operational changes that intersect with LIHTC compliance

In addition, owners and managers should be mindful of the Housing Opportunity Through Modernization Act (HOTMA) as it’s implemented across HUD-assisted programs. While HOTMA doesn’t amend Section 42, it changes the income definitions, asset thresholds, and verification practices affecting operations at properties with layered HUD assistance.

For these projects, verify HOTMA-driven operational changes don’t conflict with LIHTC documentation, recertification, and record-retention requirements. HOTMA offers greater flexibility, but only when compliance processes remain clearly aligned across programs.

Planning ahead on the Low-Income Housing Tax Credit

Recent changes are expanding LIHTC opportunity while increasing compliance complexity. Owners and sponsors who proactively align deal structuring, operational practices, and compliance systems can help manage risk and preserve credit value over the long term.

How CLA can help with LIHTC compliance

Navigating LIHTC compliance and HUD rules requires both deep technical knowledge and practical industry insight. CLA’s real estate practice brings a lifecycle-based approach, combining audit, tax, and advisory services with hands-on experience across affordable housing, HUD-insured properties, and federally-funded programs.

Our teams work with owners and sponsors to help interpret evolving requirements, strengthen compliance processes, and reduce risk.

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