IRS Clarifies How to Calculate Income Limits for LIHTC Average Income Set Aside


The Internal Revenue Service recently released revenue ruling 2020-4 which instructs taxpayers how to calculate Low-Income Housing Tax Credit (LIHTC) income limits should they choose to use the income averaging minimum set-aside test to meet LIHTC eligibility and compliance requirements. This test was created by the Consolidated Appropriations Act of 2018 (the 2018 Act) to complement the existing tests established by the Tax Reform Act of 1986 (TRA86).

Two minimum set-aside tests were set forth in TRA86: the so-called “20-50” and “40-60” tests, each of which sets the share of residential units in a building that must be rent restricted as well as the maximum annual income for tenants in these units. Under the 20-50 test, at least 20% of the units in a LIHTC project must be both rent-restricted and occupied by tenants whose gross income is 50% or less of the area median gross income (AMGI). The percentages are 40% and 60%, respectively, if a taxpayer elects to use the 40-60 test.

The rigidity of these requirements led to increased discussion of an average income test, culminating with the 2018 Act. The Act amended the tax code to specify that a project meets the minimum requirements of the average income test if “at least 40% (25% or more in the case of a project located in a high cost housing area) of the residential units in the project are both rent-restricted and occupied by tenants whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit.” The average of the residential unit income limitations must not exceed 60 percent of AMGI.

To calculate this average, the taxpayer must designate the imputed income limitation for each unit. These designated limitations may only be 20, 30, 40, 50, 60, 70, or 80 percent of AMGI.

The revenue ruling specifies that the dollar amounts of these limitations are based on HUD’s very low-income (VLI) limits used for determining Section 8 Housing eligibility. To calculate the dollar amount of each one of the seven possible designated limitations, the taxpayer multiplies the designated percentage by two. They then multiply this percentage by the very-low income limit set by HUD for their area, adjusted for family size.

For instance, the 20% designation used in the income averaging set-aside test is equal to 40% or less of the income limit for a very-low income family of the same size. Similarly, the 80% limit is equal to 160% of the same dollar amount (Table 1).

Table 1

Table 2 shows the income limit calculations for a hypothetical unit in El Paso, Texas, housing a family of four.

Table 2

Each year, the owner must average the income limitations of all rent- and income-restricted units to comply with the income averaging set-aside test.


Shown in Table 3, we start with a project containing 100 residential units, 40 of which are both rent-restricted and occupied by tenants whose gross income is equal to or less than the imputed income limitation designated to each tenant’s respective unit. The owner elects the income average set-aside test and, to start, designates six units at each of the lower five income limitation designations (for a total of 30 units), five units at the 70% designation, and five units at the 80% designation. For consistency and ease of calculation, assume each unit houses a family of four and that the project is located in El Paso, Texas.

Calculation Method 1

One may calculate the average two ways, both of which will result in the same number. The first method, shown in Table 3, uses the percentage of total LIHTC units given each designation as a weight. With 40 total LIHTC units, the weight is found by dividing each value in row (2) by 40. Those weights (row 3) are then multiplied by the very low-income limitations for each unit designation (row 4), which gives the weighted income limitations of designated units (row 5). Adding all of the values in row 5 gives the weighted-average imputed income limitation for LIHTC units in the project.

Table 3

As the average imputed income limitation is less than $35,220 (60% of AMGI for El Paso, TX), the project meets the income average set-aside test requirements.

Calculation Method 2

Table 4 calculates the average income limitation in another manner. Using this second (mathematically equivalent) method, the average is derived by:

  • Multiplying the number of units per designation (row 2) by the corresponding VLI limitations (row 3),
  • Summing the resulting values (row 4, columns A through G), then
  • Dividing the result by the total number of designated LIHTC units.

Note that no more than two-thirds of the LIHTC units may be designated as 80% units. For instance, the project outlined above would be under that threshold if 26 units (65% of the total) were designated as 80% units but would not meet the set-aside test if that number increased to 27 (67.5%). In that case, only 13 units would be left to designate at 20%, the designation that would push the average down most efficiently. The average income limitation would then be $35,514 (see Table 4), or $294 above the maximum allowable.

Table 4

Please note that, although the income averaging set-aside test may provide short-term flexibility, the election to use the test is irrevocable for the entire compliance period of the project.


This article is for informational purposes only. It should not be considered tax advice. Before making any tax decisions, work with a tax professional. For more detail, please see the full disclaimer.

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1 reply

  1. A bit confusing right now. But we hope it works out.
    Thank you for the update

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