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IRC § 42(g)(1)(C) · AHCIA 2018 · T.D. 9967 (2022)

LIHTC Income Averaging.

The AHCIA 2018 election that lets a single LIHTC project mix 20%, 30%, 40%, 50%, 60%, 70%, and 80% AMI units — provided the unit-weighted average doesn't exceed 60% — and the IRS T.D. 9967 final regulations that govern how it works in practice.

60% avg
max project-wide average
7 tiers
20/30/40/50/60/70/80 AMI
2018
AHCIA enacted
2022
T.D. 9967 finalized
Updated May 11, 2026 · Post-OBBBA landscape

What income averaging is

Income averaging is a LIHTC unit-mix election authorized by the Affordable Housing Credit Improvement Act of 2018 (AHCIA, enacted as part of the Consolidated Appropriations Act of 2018, P.L. 115-141) and codified at IRC § 42(g)(1)(C). Prior to AHCIA, an owner electing LIHTC for a property had to commit either to the 20-50 test (at least 20% of units at 50% AMI or below) or the 40-60 test (at least 40% of units at 60% AMI or below). Income averaging adds a third option: the 40-60 average test.

Under income averaging, an owner commits that at least 40% of a project's units are rent-restricted and income-restricted, with each restricted unit's designated income limit being one of seven specified percentages (20%, 30%, 40%, 50%, 60%, 70%, or 80% of AMI), and the average of all restricted-unit designations not exceeding 60% AMI.

How it works in practice

An income-averaged project can include deeply-affordable units (20%, 30%, 40% AMI) and workforce-affordable units (70%, 80% AMI) in the same building, with the deep units bringing the average down to 60% so the workforce units can also be LIHTC-restricted. This produces three structural advantages over the traditional 40-60 election:

  • Deeper affordability is feasible. Owners can include 30% or 40% AMI units — which serve household income groups the regular 60%-AMI restriction does not reach — without giving up LIHTC eligibility on the entire unit count.
  • Workforce-affordable units can carry LIHTC. 70% and 80% AMI units, which would not qualify under the 40-60 test, can be LIHTC-restricted and contribute to eligible basis.
  • Mixed-income development is structurally supported. Income averaging creates a regulatory pathway for buildings that mix deep affordability and workforce-affordability in a single LIHTC-financed property — a structure that prior to AHCIA required separate property-level capital sources for each income tier.

The IRS Final Regulations (T.D. 9967)

Treasury and IRS issued Final Regulations on income averaging in October 2022, codified as Treasury Decision 9967, updating 26 CFR § 1.42-19 and related provisions. The regulations clarified several practitioner-facing mechanics that had been unclear in the statute and proposed regulations:

  • The "Available Unit Rule" under income averaging. When a low-income tenant's income exceeds 140% of the tenant's designated income limit (the "next-available-unit" trigger), the next available comparable or smaller market-rate unit must be rented to a household at an income level necessary to maintain the project's overall average.
  • Mitigation of compliance failures. A mitigation framework allowing owners to cure unit-level compliance problems by re-designating a different unit's income limit, subject to specified mitigation procedures and timelines.
  • Unit designations. Owners must designate each LIHTC unit's income limit (20/30/40/50/60/70/80) at or before placed-in-service, with the designations recorded and reported to the state HFA.
  • Average calculation. The 60% average is calculated as a unit-weighted average — not bedroom-weighted, not square-foot-weighted — of all LIHTC-restricted units' designated income limits.

Practitioner considerations

Income averaging is widely but not universally used in post-2018 LIHTC deals. Practitioners weigh three trade-offs:

  • Pro: deeper affordability. States increasingly score QAPs to reward deep affordability (30% and 40% AMI units). Income averaging is often the cheapest way to add deep units without losing eligible basis.
  • Pro: workforce capacity. 70% and 80% AMI rents are meaningfully higher than 60% rents, improving project NOI and supporting more debt — relevant in markets with high construction cost.
  • Con: compliance complexity. Tracking seven possible income levels, the unit-weighted average, and the next-available-unit rule under multiple designations is materially more complex than the traditional 40-60 test. Some LP investors price income-averaged deals at slightly lower equity prices to reflect compliance risk.
  • Con: state HFA scoring may favor specific structures. Some state QAPs (NY HCR, for example) provide scoring bonuses for income averaging; others (some pre-2022 cycles) treated it neutrally or unfavorably. Check the relevant state QAP.

AMI mechanics under income averaging

Each restricted unit's income limit is calculated as a percentage of HUD's published Area Median Income for the relevant metropolitan or non-metropolitan area. HUD publishes annual AMI limits — Multifamily Tax Subsidy Project (MTSP) limits — that LIHTC properties use. Properties are "held harmless" against AMI reductions: a unit's income limit cannot decrease below its level in the prior calendar year.

Family-size adjustments apply: HUD publishes income limits at the four-person AMI level, with adjustments for smaller and larger household sizes. The applicable adjustments are 70%/80%/90% of four-person AMI for 1/2/3-person households, and 108%/116%/124%/132% for 5/6/7/8-person households (subject to HUD's specific table).

Post-OBBBA implications

OBBBA (P.L. 119-21, signed July 4, 2025) did not amend the income-averaging provisions. AHCIA's income-averaging election remains available with the T.D. 9967 mechanics fully in effect. The post-OBBBA increase in 9% LIHTC ceiling and decrease in 4% LIHTC bond financed-by test increase total deal flow, which increases practitioner exposure to income averaging — but the substantive rules are unchanged.

Sources

  • IRC § 42(g)(1)(C) (income averaging election)
  • Affordable Housing Credit Improvement Act of 2018, P.L. 115-141 (Consolidated Appropriations Act 2018, Div. T)
  • Treasury Decision 9967 (Income Averaging Final Regulations, October 2022)
  • 26 CFR § 1.42-19 (income-averaging regulations)
  • HUD MTSP Income Limits, published annually
  • P.L. 119-21, One Big Beautiful Bill Act, enacted July 4, 2025

Disclaimer

Income averaging is a state-administered LIHTC election with state-specific QAP and compliance variations. Practitioners should consult the relevant state QAP, IRS guidance under T.D. 9967, and qualified tax counsel before electing income averaging or structuring an income-averaged project. This is educational content and is not legal, tax, or financial advice.