Closing a Low-Income Housing Tax Credit transaction is not the finish line. It is the start of a compliance obligation that runs for a minimum of 30 years, split across two different monitoring entities which have different risk factors, different enforcement mechanics, and different consequences for the investor’s return. Understanding where one entity’s risk factors end and the other begins, is what separates a taxpayer that treats LIHTC monitoring as a formality from one that protects the credit it paid for.
Every LIHTC building runs on two overlapping timelines. The 15-year compliance period begins with the first year the owner claims credits, typically the year the building is placed in service. An owner can elect on Form 8609 to defer the start of the tax credit period by one year. Any time through the tax credit period during which there is a notice of noncompliance can trigger IRS-reported findings and credit recapture under Section 42(j). Layered on top of the tax credit period is the extended use period, which Section 42(h)(6) requires as a condition of receiving credits at all. The owner must record an extended low-income housing commitment (commonly called a land use restriction agreement, or LURA) obligating the property to remain affordable for at least 15 additional years beyond the compliance period, for a combined minimum of 30 years of restricted use.
The two periods do not run simultaneously, but consecutively. During the 15-year compliance period, the state housing credit agency’s findings flow to the IRS and can result in the owner losing previously claimed credits, plus interest, if noncompliance is not corrected. During the extended use period, typically years 16 through 30, the state agency continues to monitor the property against the LURA, but findings during this window generally are not reported to the IRS and do not trigger recapture under Section 42. The consequence of noncompliance shifts from a federal tax event to a contractual and reputational one, enforced through the LURA itself rather than the credit mechanism.
State agencies test compliance against whichever minimum set-aside election the owner made at the start of the credit period, the 20/50 test, the 40/60 test, or the average income test added by the Consolidated Appropriations Act of 2018. Investors should confirm which election applies to a given transaction, as the designations change what “in compliance” means unit by unit.
The average income test carries a materially heavier monitoring burden than the two other tests. The average income designation requires that units labeled as such must be tracked, reported annually to the state agency, and reconciled against the project-wide average, which cannot exceed 60 percent of AMI. Final Treasury regulations issued in October 2022 clarified that a single noncompliant unit generally affects only that unit’s qualification rather than collapsing the entire building’s eligibility. This was known as the “cliff test” problem in the earlier proposed rules, but the regulations also confirmed that a unit that loses its designation can force a cascading reshuffling of the applicable fraction under the available unit rule. This is one of the more technically demanding areas of ongoing compliance.
Beyond the set-aside test, recurring monitoring items during the 15 year tax credit compliance period include annual income recertification of tenant households, rent restriction calculations tied to updated area median income figures, utility allowance updates, the vacant unit rule and next available unit rule governing what happens when a low-income unit turns over or a market-rate unit becomes available, student eligibility restrictions, and record retention. States vary in how they physically examine the files annually versus allowing streamlined self-certification after the first year or two. The applicable state’s monitoring manual and the property’s LURA control the specifics.
Treasury’s monitoring regulations under Section 1.42-5 require physical inspections of LIHTC properties, and those regulations point to HUD’s inspection protocol. That protocol changed in 2023 from the Uniform Physical Condition Standards (UPCS) framework used since 2000 to the National Standards for the Physical Inspection of Real Estate (NSPIRE) which became effective for most programs as of October 1, 2023. There was a delayed compliance date of October 1, 2024 for certain voucher and community development programs. Because Treasury’s regulations reference HUD’s inspection standard rather than UPCS by name, the shift to NSPIRE carried through automatically to LIHTC monitoring.
NSPIRE reorganizes inspectable areas into three categories, unit, inside, and outside. NSPIRE also replaced UPCS’s numbered severity levels with a binary deficiency model further classified mostly as health-and-safety issues., The mandated correction windows were tightened to as short as 24 hours for severe health-and-safety deficiencies and 30 days for standard issues under the HUD framework. State agencies retain discretion under Section 1.42-5 to apply their own correction periods for LIHTC-specific findings. Most states are expected to reserve the HUD-mandated rapid turnaround for the most severe health-and-safety items while using their existing discretion for the rest. Investors should confirm which correction framework their state asset manager or compliance monitor is applying at each property since this is a live transition and practice still varies by state agency.
When a state agency identifies noncompliance during the 15-year compliance period, it must notify the owner and allow a correction period, generally 90 days and extendable up to six months for good cause. If the issue is corrected within that window, the agency still files Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition, with the IRS, but marks it as corrected. If it is not corrected, the agency reports the uncorrected finding, and the IRS may pursue recapture.
Recapture, when it applies, is calculated on Form 8611 and generally reaches back to the prior three tax years of accelerated credit attributable to the affected units, in addition to the credit lost for the noncompliance year itself, plus interest. A single Form 8823 filing can also be enough to trigger a broader IRS review of the ownership entity’s returns for that property. Industry practitioners note that corrected 8823s are the norm. State agencies generally want properties to succeed and will work with an owner who moves quickly to fix a documented issue.
The transition into the extended use period is where sponsor type and deal structure intersect directly with ongoing monitoring. Once the compliance period ends, state agencies continue to monitor the property against its LURA, but findings are no longer reported to the IRS and no longer create recapture exposure under Section 42. That does not mean oversight disappears — many states require modified annual certifications, periodic physical inspections, and continued income and rent restriction compliance through the full extended use term. The consequence of a finding shifts from a tax exposure to a contract enforcement matter under the LURA.
This has practical implications for anyone evaluating a position in a property approaching or past Year 15. Extended-use-period monitoring requirements vary significantly by state, some agencies allow tenant self-certification of income after the first recertification, others require full recertification on a multi-year cycle.Enforcement remedies for a LURA violation depend entirely on that the individual state’s agreement says, since the federal recapture backstop is gone. A buyer of a secondary interest in a post-Year-15 property is underwriting state-specific contract risk, not IRS-enforced tax risk. The buyer should review the recorded LURA and the state agency’s extended-use monitoring policy directly rather than assuming the original compliance framework still applies unchanged.
LIHTC compliance is not a closing-day checklist item, it is a multi-decade obligation with a hard pivot at Year 15. During the compliance period, the stakes are federal: uncorrected noncompliance reported on Form 8823 can mean IRS recapture exposure. After Year 15, the stakes shift to state enforced contract compliance under the LURA, with requirements that vary by jurisdiction. Investors who track which jurisdictions apply to a given property, who read the recorded land use restriction agreement rather than assuming a standard template, are in a materially better position to protect the value of the credit they invested in.
Internal Revenue Code Section 42, Low-Income Housing Credit — Cornell Law School Legal Information Institute: https://www.law.cornell.edu/uscode/text/26/42
Novogradac, “Post Year-15 Compliance Monitoring”: https://www.novoco.com/periodicals/articles/post-year-15-compliance-monitoring
Novogradac, “Understanding the Final Adoption of the Available Unit Rule with the LIHTC Average Income Test”: https://www.novoco.com/periodicals/articles/understanding-final-adoption-available-unit-rule-lihtc-average-income-test
Novogradac, “NSPIRE Compliance Date Delayed to Oct. 1, 2024: What Will Change for HUD and LIHTC Property Inspections?”: https://www.novoco.com/periodicals/articles/nspire-compliance-date-delayed-oct-1-2024-what-will-change-hud-and-lihtc-property-inspections
Novogradac, “Don’t Panic: What to Do if You Get a Form 8823 of Noncompliance”: https://www.novoco.com/periodicals/articles/dont-panic-what-do-if-you-get-form-8823-noncompliance
CohnReznick, “Final Regulations Issued for LIHTC Average Income Test”: https://www.cohnreznick.com/insights/final-regulations-issued-lihtc-average-income-test
Nixon Peabody LLP, “IRS Publishes Revised Average Income Regulations for LIHTC”: https://www.nixonpeabody.com/insights/alerts/2022/10/13/irs-publishes-revised-average-income-regulations-for-lihtc
LegalClarity, “What Is the 8823 Form and How to Correct Noncompliance?”: https://legalclarity.org/what-is-the-8823-form-and-how-to-correct-noncompliance/
National Center for Housing Management, “IRS Form 8823 and the 8823 Guide”: https://www.nchm.org/irs-form-8823-and-the-8823-guide/
EisnerAmper, “Credit Where Credit Is Due: Surviving an IRS Audit of the Low-Income Housing Credit”: https://www.eisneramper.com/insights/tax/irs-audit-lihc-0626/
Central PA CPA (MLCM), “Credit Compliance and Extended Use Periods”: https://mlcm.net/credit-compliance-and-extended-use-periods/
LegalClarity, “LIHTC Extended Use Period: The 30-Year Affordability Commitment”: https://legalclarity.org/lihtc-extended-use-period-the-30-year-affordability-commitment/
The Habitat Group, “HUD Issues NSPIRE Appeals Guidance”: https://www.thehabitatgroup.com/articles/9352
Maryland DHCD, LIHTC Compliance and Monitoring Policy (Extended Use Period): https://dhcd.maryland.gov/Credit-Assurance/Documents/lihtc-compliance-and-monitoring-policy.pdf
Disclaimer: This article is provided for general informational and educational purposes only and does not constitute legal, tax, accounting, or investment advice. LIHTC compliance and monitoring requirements are fact-specific, vary by state housing credit agency and by the terms of the recorded land use restriction agreement applicable to a given property, and are subject to change; readers should consult qualified legal and tax counsel and review the applicable state agency’s compliance manual regarding their particular circumstances. No statement in this article should be construed as an offer or solicitation to buy or sell any security or tax credit interest.