For LIHTC sites, compliance with the minimum set-aside requirement is fundamental. This requirement establishes the minimum number of units that must be rented to income-qualified households and serves as the threshold for a project’s eligibility to claim any tax credits. Failure to meet the minimum set-aside by the required deadline renders the entire project ineligible for credits. In subsequent years, falling below the required minimum can result in the recapture of previously claimed credits and the suspension of current-year credits until the issue is resolved.

For site managers, it’s important to understand how the minimum set-aside election was made, how it's calculated, and how it affects leasing activity, household income qualifications, and rent limits. This knowledge is essential not only for initial lease-up, but also for ongoing compliance throughout the life of the project.

We’ll go over the basics of minimum set-aside requirement, including the types of elections available, how the minimum set-aside is calculated, and the consequences of noncompliance. Understanding these core principles will help you monitor your unit mix and ensure that your site remains able to claim valuable low-income housing tax credits.

Minimum Set-Aside Basics

The minimum set-aside is an election made by the owner of your site, and it plays a central role in defining the compliance obligations of site managers and leasing staff, and informs how income eligibility and rent limits must be applied. The choice is formally recorded on IRS Form 8609 and is irrevocable. It defines the minimum percentage of units that must be rented to qualified low-income households, and the income limits that those households must meet.

Set-aside types. There are three primary federal set-aside options:

• 20-50 Test: A minimum of 20 percent of the units must be occupied by households earning no more than 50 percent of area median income (AMI);
• 40-60 Test: A minimum of 40 percent of the units must be occupied by households earning no more than 60 percent of AMI.
• Average Income Test (AIT): A minimum of 40 percent of units must be both rent-restricted and designated at specific income levels (ranging from 20 percent to 80 percent of AMI in 10 percent increments), with the average designation across those units not exceeding 60 percent. In other words, units that will be considered tax credit units may include 70 and 80 percent units, but enough units must be at designated below 60 percent to average 60 percent of AMI.

In New York City specifically, there are two additional minimum set-aside types available. These are the 25-60 Test, which lowers the threshold to 25 percent of units at or below 60 percent AMI, and a localized version of AIT that also requires only 25 percent of units to be designated, provided the income average remains at or below 60 percent.

It’s important to note that beyond the minimum set-asides imposed at the federal level, your site may have additional set-asides imposed by the state or other funding sources. For example, a state’s qualified action plan might include deeper affordability targets. Or HOME program rules may layer on separate rent and income limits. While noncompliance with the other state-level requirements can still trigger enforcement issues, it won’t cause the IRS to disqualify the tax credits as long as the federal minimum set-aside is still being met. 

Deadline to meet set-aside. The minimum set-aside must be met by a specific deadline. The deadline for a site to meet its minimum set-aside is on line 10a on the owner’s IRS Form 8609. This line asks whether the owner “elect[s] to begin credit period the first year after the building is placed in service.” If the owner checked “no,” the deadline for meeting the set-aside is the end of the placed-in-service (PIS) year. But if the owner checked “yes,” the deadline is the end of the taxable year after the PIS year.

Failure to meet this requirement results in the loss of all credits for the project. Beyond the first year, ongoing compliance with the elected set-aside is required each year of the compliance period to avoid credit recapture and suspension of future credits.

Set-Aside Calculations, Multi-Building Considerations

Set-aside compliance is calculated based on the number of residential units in the project, regardless of unit size or bedroom count. The minimum set-aside is met when the required percentage of units, as determined by the site’s elected set-aside, are both income-qualified and rent-restricted according to program rules. 

For example, under the 40-60 test, a project with 100 total units must have at least 40 units occupied by qualified households at or below 60 percent of AMI. Each unit counts equally toward that total, whether it's a studio or a two-bedroom apartment.

For multi-building sites, however, an additional factor must be considered. The owner may have elected to treat the site as a single project or as individual buildings for compliance purposes. This decision is recorded on line 8b of IRS Form 8609, which asks whether the owner is “treating this building as part of a multiple building project.”

If the owner elects “yes” for all buildings, then the buildings are treated as part of one project, and the required set-aside percentage may be met across the entire site. This allows flexibility. For example, a site may qualify all required low-income units in just a few buildings, while leasing the remaining buildings at market rate.

If the owner elects “no,” then each building must meet the minimum set-aside independently. This means the required percentage of qualified units must be present in each building, and failing to meet the threshold in even one building could disqualify it from the LIHTC program. Because the multi-building election directly affects how set-aside compliance is measured, you should verify how your site was classified on Form 8609. 

What Happens if Minimum Set-Aside Isn’t Met

If the set-aside minimum set-aside isn’t met by the end of the PIS year or the end of the taxable year after the PIS year, depending on the election made on Form 8609, the IRS will consider the entire site ineligible for credits.

Even after that first year, the pressure doesn’t let up. In any subsequent year, dropping below the required number of qualified units means credits for that year are disallowed and previously claimed credits may be subject to recapture. For example, if a site qualified under the AIT and later lost a higher-income unit, the average designation could rise above 60 percent, affecting the eligibility of multiple units and triggering credit loss.

This is why ongoing monitoring of income certifications, rent limits, and occupancy levels is essential. Set-aside compliance is not a one-time achievement. It’s a standard that must be upheld continuously over the compliance period.