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Calculating the Qualified Basis 

There are four steps involved in calculating the qualified basis: 

Step 1: Determining the Eligible Basis. The "eligible basis" is the amount of all depreciable development costs that may be included in the calculation of housing tax credits. Eligible depreciable costs include all "hard" costs, such as construction costs, and most depreciable "soft" costs, such as architectural and engineering costs, soil tests, and utility connection fees. Some examples (though not entirely inclusive) of what is EXCLUDED from the eligible basis are the following non-depreciable costs:

  • Acquisition costs for land;
  • Permanent financing costs; and
  • Initial deposits to reserves.



If a federal grant financing or below-market-interest-rate financing is used, the amount of eligible basis often will be reduced. Similarly, if the IRS determines that financing that is structured as a loan is actually a federal grant, the amount of eligible basis may be reduced. Of course, a reduction in eligible basis means a reduction in the amount of tax credit and the amount of syndication proceeds the developer can raise. Therefore, most developers seek to avoid the use of federal grant financing in most LIHTC projects.

 Step 2: Determining Applicable Fraction. The percentage of qualified low-income units is referred to as the "applicable fraction." If the owner fails to achieve the projected applicable fraction, the amount of credits is reduced. 

Note that the "Applicable Fraction" is the lower of two percentages: the percentage of affordable units to total units, and the percentage of square feet in the affordable units to the total square feet in the project. The IRS monitors Applicable Fraction on a building by building basis. At the time each building is first occupied ("placed in service"), the developer and IRS establish a minimum Applicable Fraction for that building that the developer must maintain for the entire affordability period. Typically, developers prefer to structure their LIHTC projects so that each building has an Applicable Fraction of 100% or 0%, because this makes ongoing compliance much easier. 

Step 3: Determining Qualified Basis. The "qualified basis" refers to the dollar amount that is eligible for housing tax credits. 

Step 4: Adjustments to the Calculation. If the development is located in a HUD-designated high cost area (HCA), the state allocating agency may award up to 30% additional LIHTCs (LIHTC practitioners refer to this as a "basis boost"). These areas include both Qualified Census Tracts (QCTs) and Difficult Development Areas (DDAs). To learn more about the methodology HUD uses to identify QCTs and DDAs, or to view a list of QCTs and DDAs, visit the HUD User web site. To identify what census tract you are located in, visit the Census Bureau's Census Tract Street Locator