Skip to content


10% Tests, 50% Tests, and Cost Certifications – What’s the Difference?

Affordable housing developers and owners of low-income housing tax credit (LIHTC) properties need to complete very specific requirements in order to qualify. LIHTCs for qualified, affordable housing developments are awarded based on certain ranking criteria set forth by each state in their Qualified Allocation Plan. Developers use the tax credits to raise equity from private investors. This equity investment reduces the debt burden on the tax credit property, making it financially feasible to offer lower, more affordable rents. Depending on your deal structure to acquire, rehabilitate, and/or construct rental housing using LIHTCs, you may need to complete a 10% test or a 50% test and a cost certification. Read on for information about each of these important reports.

10% Test

Generally, a development must be placed in service in the year that the tax credit allocating agency awards the low-income housing tax credits. A Carryover Allocation Agreement will extend the placed-in-service date to the end of the second calendar year after the year the LIHTCs are awarded. To have a valid Carryover Allocation Agreement in place, satisfying the 10% test rule is critical.

Failure to pass the 10% test can cause the development to lose the tax credits reserved for it. In other words, this is an all-or-nothing “cliff” test. To meet the 10% test, a development must incur 10% of the costs that fall under the definition of reasonably expected basis (REB) by the date noted in their state’s tax credit allocation guidelines. REB is the estimated land and depreciable property expected to be part of the development of the LIHTC property. It is common to extend the time for placing a development into service by executing a Carryover Allocation Agreement and satisfying the 10% Test.

50% Test

The 50% test is specific to tax-exempt bond deals. If the development is expected to be financed with at least half (50%) tax-exempt bonds and all units will be qualified low-income, the development may qualify for and receive a 4% LIHTC allocation without competing in the state’s LIHTC funding round. To satisfy this test, 50% or more of the tax-exempt bond proceeds must be used to finance the aggregate basis of the building and the land on which the building is situated. Developers must ensure that they monitor costs and avoid cost overruns that could put the 50% Test in jeopardy. If the development does not pass the 50% Test, then the 4% LIHTCs received would be equal to the percentage of the development financed with the tax-exempt bonds, rather than 100%, which would leave the development with a large funding gap.

Cost Certification

A cost certification is necessary to establish an eligible basis by the state’s tax credit allocating agency as required by the IRS. The cost certification is required for the IRS Form 8609 to be issued, which allows the owner to claim the LIHTCs. This report certifies how much money was spent on the construction and development of the property. It requires that costs be put into specific categories as defined by the state’s tax credit allocating agency. The tax credit allocating agency also limits certain cost categories and has various requirements in place. A cost certification is required within a timeframe set by the state’s tax credit allocating agency after the last building in the development is placed into service.

McKonly & Asbury, LLP is a leader in accounting for affordable housing developments in Pennsylvania. IRS and PHFA regulations require specialized knowledge when preparing 10% Tests, 50% Tests, and Cost Certifications. Our team has the specialized knowledge to help ensure you comply with IRS and tax credit allocating agency reporting requirements. For more information on these services and more, be sure to visit our Affordable Housing page, and don’t hesitate to contact us.

The information presented in this post is intended solely for informational purposes and should not be construed as accounting advice from McKonly & Asbury, LLP.

About the Author

Elizabeth Harriger

Elizabeth is a Partner with McKonly & Asbury as well as the Director of our firm’s Affordable Housing Services. She has over twenty years of extensive audit, tax, and consulting experience in the affordable housing industry. Elizabe… Read more

Related Services


Related Industries

Subscribe to Our Newsletter

Contact Us