How the LIHTC Average Income Set-Aside Works: Rules, Designations, and Compliance Steps for Owners
The average income test, added to the Low-Income Housing Tax Credit in 2018, lets projects serve households at up to 80 percent of area median income as long as designated units average 60 percent or below. Each low-income unit gets its own imputed income designation from a fixed menu of 20 to 80 percent, and at least 40 percent of project units must sit in a qualifying group. Owners must identify the qualifying group every taxable year, record designations before first occupancy, and report annually to the state housing credit agency. The final regulations at 26 CFR 1.42-19 permit designation changes in defined circumstances and provide correction procedures for procedural failures. State qualified allocation plans layer their own rules on top, so a designation mix that passes the federal test can still fail state conditions.