The first year of a Low-Income Housing Tax Credit (LIHTC) site’s credit period is important not only for ensuring regulatory compliance but also for setting the tone for a successful 15-year compliance period. Maximizing LIHTCs in the new site's first year requires careful planning around timing and occupancy.

In the initial year, the number of credits an owner may claim is based on the average of the applicable fractions for each month the building is in service. The applicable fraction is the percentage of rental units in a building that qualify as low-income units. Specifically, under Internal Revenue Code (IRC) §42(c)(1)(B), the applicable fraction is the smaller of the unit fraction or the floor space fraction. IRC §42(c)(1)(C) defines “unit fraction” as a fraction whose numerator is the number of low-income units in the building, and whose denominator is the number of residential rental units in such building. And IRC §42(c)(1)(D) defines “floor space fraction” as a fraction whose numerator is the total floor space of the low-income units in such building, and whose denominator is the total floor space of the residential rental units. The average across the year determines how much of the annual credit may be claimed in the first year.

Because investor equity pricing is often adjusted based on the amount of the first-year credits, it's important for a project to maximize the amount of low-income housing tax credit earned in the first year. Site managers play a critical role in maximizing credits by aligning certifications, lease-up timelines, and documentation with IRS rules. We’ll go over the strategies around timing and occupancy for capturing every allowable credit in the first year of the credit period.

Ensure Each Building Is Placed in Service on the First of the Month

Under IRS rules, credits may be claimed for a month only if the building was in service for that entire month. That means if a building is placed in service on Jan. 2, it can't earn credits for January even if tenants move in later that month.

In the case of new construction or substantial rehabilitation, the placed-in-service (PIS) date is generally the date the Certificate of Occupancy (C of O) is issued. This marks the point when at least one unit in the building is considered ready and available for occupancy under state or local law. The PIS date isn't the date when construction is fully complete or when the first resident moves in. This ensures that lease activity in that month can count toward the monthly applicable fraction, helping to raise the average occupancy used to calculate first-year credits.

Importantly, the owner has some control over when a building is placed in service, since they can schedule the inspection that triggers the issuance of the C of O. Once issued, the C of O must be submitted to the state housing agency, which uses its issuance date as the building’s PIS date and records it on Form 8609 (Line 5) for submission to the IRS.

By coordinating with the development and construction teams, you can help ensure that each building is placed in service on the first day of the month. This not only allows credits to begin accruing that month, but also initiates the owner’s ability to claim tax credits for any units already leased to qualified tenants. In addition, placing the building in service also triggers the beginning of formal compliance monitoring by the state housing agency, so documentation and leasing procedures must be accurate and audit-ready from day one.

Remember Occupancy by the Last Day of the Month Is Enough

A common misconception is that a tenant must occupy a unit for a full month to be counted as a low-income unit for credit purposes. In fact, IRS Revenue Ruling 2004-82 clarifies that a unit can count for the entire month as long as:

            •          The building was in service for the full month, and

            •          The unit was occupied on the last day of the month by a qualified household.

We often see tenants moving in on the first day of the month, but during initial lease-up, the exact move-in date can make a big difference. Staff can work toward move-ins even at the end of the month and still help the owner qualify for credits that month, as long as all eligibility documentation is completed. In other words, the revenue ruling doesn't require full-month occupancy, but it does require occupancy as of the last day of the month, which means the resident must physically occupy the unit or have taken legal possession such as receiving keys or being granted access by the last day of the month.

For example, if a qualified tenant moves in on July 1, the unit counts as qualified starting in July. But if that same tenant had moved in just one day earlier, on June 30, the unit would qualify for June instead. That single day can add an extra month of qualification to the applicable fraction calculation, potentially increasing the amount of first-year credits the owner can claim.

Begin Lease-Up Early to Raise the Average Applicable Fraction

In the first year of the credit period, the IRS calculates the allowable credits based on the average of the monthly applicable fractions. If most leasing activity occurs late in the year, even full occupancy by December may not offset low occupancy in the earlier months. You should aim to have units leased to qualified low-income tenants as soon as the building is placed in service. The sooner you achieve occupancy, the higher the average monthly occupancy for the year, increasing the applicable fraction, and thus the first-year credits. Starting lease-up as early as possible helps increase the monthly averages and ensures a higher share of the first-year credits can be claimed.

You should work closely with site staff and marketing teams to support early move-ins and timely certifications, especially in buildings placed in service early in the year. If the first-year fraction falls short of the target fraction, the owner may still receive credits on the shortfall, but those credits will be claimed over the 15-year compliance period instead of the standard 10-year credit period. This makes first-year occupancy a priority.

Don’t Confuse the Minimum Set-Aside with the Target Fraction

Every LIHTC site must meet two separate occupancy goals in the first year. First, the site must meet the minimum set-aside, which ensures program eligibility (e.g., 40% of units at 60% AMGI); and the target fraction for each building, which determines how many credits the owner may actually claim.

The minimum set-aside requires the owner to rent a certain percentage of units to income-qualified low-income households. Traditionally, this meant either 20 percent of units at 50 percent of area median gross income (AMGI), or 40 percent of units at 60 percent of AMGI. As of the 2018 Consolidated Appropriations Act, a third, income-averaging option was introduced. This allows a site to qualify if 40 percent of units are set aside for households at various AMGI levels, provided the average doesn't exceed 60 percent. Individual units may target 20 percent, 30 percent, 40 percent, 50 percent, 60 percent, 70 percent, or 80 percent AMGI, offering greater flexibility but requiring closer oversight.

If the minimum set-aside isn't met by the end of the first year of the compliance period, the entire site becomes ineligible for credits, meaning the owner forfeits all allocated tax credits. The target fraction, by contrast, is building-specific. It's the percentage of a building’s space that must be designated and occupied as low-income to enable the owner to claim the full credit allocation. If the target fraction isn’t met, the building still qualifies for the program if the minimum set-aside is met, but the owner can't claim the full allocation of credits. Additionally, any units first occupied by eligible households after the first year can only generate credits over the 15-year compliance period, rather than the standard 10-year credit period. This means those credits are delivered more slowly and are less valuable in present terms.

Lease-Up One Building at a Time When Possible

Because credits are calculated building by building, it’s often more effective to fully lease up one building rather than spreading occupancy thinly across multiple buildings. Even when managing a multi-building site, each building must meet its own applicable fraction, known as the target fraction, to qualify for the full credit allocation. Don’t assume that high occupancy in one building can offset shortfalls in another.

If lease-up is behind schedule and occupancy is lower than expected, consider supporting marketing teams by suggesting or facilitating short-term leasing incentives such as rent discounts or move-in specials. Even modest improvements in monthly occupancy, particularly in the early months for qualified households, can help increase the first-year average applicable fraction and avoid under-delivery of credits.