Affordable Housing Compliance Guide: LIHTC, HUD, USDA and HOTMA

Affordable housing compliance means proving, with paper and dates, that every household qualified when it moved in and still qualifies today. Four rule books do most of the governing: LIHTC, HUD Multifamily, Section 8 vouchers, and USDA Rural Development. HOTMA, the income and asset law, now sits on top of all four with a different start date for each. This guide walks through each program in plain words and shows where a layered property gets tangled.

What Is Affordable Housing Compliance?

Affordable housing compliance is the ongoing work of showing a funder that your residents are eligible and your rents are within limits. Eligibility usually comes down to household income against a limit set for the area. Rent is capped, or tied to what the household can pay. Both get checked on move-in and again on a schedule.

The proof lives in the tenant file. That file holds the application, income and asset verifications, the signed certification, and the notices the program requires. The funder, whether a state agency, HUD, or USDA, can sample those files later and score them.

That is why compliance feels different from ordinary leasing. A market-rate lease asks one question: can this person pay? An affordable lease asks that question plus a second one, which is whether the paperwork would survive an auditor reading it cold.

Each program below gets its own section. After that come HOTMA, file reviews, and the layered-property problem, which is where most teams lose hours.

How Does LIHTC Compliance Work?

LIHTC compliance works through a state agency that hands out the federal tax credit and then monitors the property for years. The owner promises to rent a share of units to qualifying households at restricted rents. The agency checks that promise. The rules sit in section 42 of the Internal Revenue Code.

Set-asides and the average income test

An owner picks a minimum set-aside when the project is placed in service. Under IRC 42(g)(1), the choices are:

• 20-50: at least 20% of units rent-restricted and held for households at 50% of area median income or less.
• 40-60: at least 40% of units rent-restricted and held for households at 60% of area median income or less.
• Average income test: at least 40% of units rent-restricted, with each unit assigned a limit from 20% to 80% of area median income in 10-point steps, and the average of those limits at 60% or less.

Rent is capped, too. A unit is rent-restricted when gross rent does not exceed 30% of its imputed income limit, per IRC 42(g)(2)(A). Gross rent includes a utility allowance, so a stale allowance throws off the rent test.

The Available Unit Rule

Incomes change after move-in. Under IRC 42(g)(2)(D), if a resident's income rises above 140% of the limit, the next comparable or smaller unit in that building has to go to a qualifying household. Projects with deep rent skewing use 170%. Until that happens, the over-income household can stay.

The rule works building by building. A property with three buildings tracks three separate answers.

Annual recertification

LIHTC owners recertify income every year. The rule in 26 CFR 1.42-5(b)(1)(vi) calls for an annual income certification from each low-income tenant, backed by documents such as tax returns, W-2s, or third-party verifications. Income is counted under the Section 8 annual income rules. The one waiver, in IRC 42(g)(8)(B), covers a building occupied entirely by low-income tenants. A mixed-income building does not get it.

Owners keep records for at least 6 years after the due date of the federal return for that year, and the first-year records for 6 years past the last year of the compliance period. The compliance period itself runs 15 taxable years under IRC 42(i)(1). An extended use period follows, and the extended use agreement sets how long.

The student rule

A household made up entirely of full-time students generally cannot count as a low-income unit. IRC 42(i)(3)(D) lists the exceptions: a household with a member in a job training program, one receiving assistance under Title IV of the Social Security Act, one with a member who was in foster care, a single parent with children who are not dependents of someone else, and a married couple eligible to file a joint return. College-town properties hit this rule all the time.

Who watches the owner

The state agency inspects buildings and reviews tenant files at least once every 3 years after the first review, under 26 CFR 1.42-5. The number of units sampled depends on project size. Owners also certify to the agency each year, under penalty of perjury, that the set-aside was met and each low-income tenant has a current income certification. When an agency finds noncompliance, it reports it to the IRS on Form 8823.

For a real-life walk through the LIHTC side, see our post on LIHTC compliance and the tightrope it feels like. If your units stretch up toward 80% and 120% of area median income, the workforce housing management software guide covers that mixed-income math.

How Does HUD Multifamily Compliance Work?

HUD Multifamily compliance applies to properties with project-based rental assistance, which is Section 8 money tied to the building. The owner signs a HAP contract with HUD, and the household pays a Total Tenant Payment based on income while HUD pays the rest. The occupancy rulebook is HUD Handbook 4350.3. Pre-HOTMA 4350.3 REV-1 (Change 4) is still the operative handbook for 2026.

The certification: HUD-50059 and TRACS

Every move-in and every annual recertification produces a tenant certification on form HUD-50059, which owners submit through HUD's TRACS system. That form holds household members, income, deductions, rent, and the subsidy math. Errors on it, such as a missing utility allowance or the wrong rent figure, send files back.

The recertification calendar is strict. HUD's handbook calls for a first reminder to the resident at least 120 days before the anniversary, a second at 90, and a third at 60. Miss the cycle and the owner can face late processing, a retroactive rent increase, and in the worst case termination of assistance. Our resident certification workflow guide covers how teams keep that calendar from slipping.

EIV

EIV is HUD's Enterprise Income Verification system. Under 24 CFR 5.233, owners in project-based Section 8 and the other covered programs must use it in full, as a third-party source to verify income at annual and streamlined reexaminations and to reduce payment errors. Failure to use it can bring sanctions or disallowed costs.

VAWA

The Violence Against Women Act adds duties to the file. Under 24 CFR 5.2005, a covered provider gives each applicant and tenant a Notice of Occupancy Rights and a HUD-approved certification form, in multiple languages. A provider also needs an emergency transfer plan. Language access is its own topic, and our post on language access in affordable housing shows what it looks like in practice.

The math

The Total Tenant Payment is the highest of four numbers: 30% of monthly adjusted income, 10% of monthly income, welfare rent where it applies, and the minimum rent, which is $25 for project-based Section 8. Those four components come from 24 CFR 5.628. Our Section 8 rent math guide walks through a worked example, and the Section 8 rent calculator lets you check a file by hand.

What Does NSPIRE Change for HUD Inspections?

NSPIRE, the National Standards for the Physical Inspection of Real Estate, replaced the older UPCS inspection standard for HUD-assisted housing. HUD's final rule, published May 11, 2023 at 88 FR 30442, put the standards in 24 CFR part 5, subpart G, effective July 1, 2023. Notice PIH 2023-16 / H 2023-07, issued June 30, 2023, set Multifamily NSPIRE inspections to begin October 1, 2023, with Demonstration participants starting July 1, 2023.

Under 24 CFR 5.705, an inspection covers the inside, outside, and unit, and each deficiency is labeled Life Threatening, Severe, Moderate, or Low. HUD's notice requires Life-Threatening and Severe deficiencies to be corrected within 24 hours. Tag each work order with its area and severity, and the 24-hour items surface first.

What Must a Tenant Selection Plan Cover?

HUD Handbook 4350.3 REV-1, Chapter 4, requires owners to write and publish tenant selection policies that describe eligibility requirements and income limits. Its Figure 4-2 lists the required topics: project eligibility, income limits, how applications are taken and the waiting list is worked, screening criteria, occupancy standards, unit transfers, Section 504 and Fair Housing policies, when the waiting list opens and closes, student eligibility, and VAWA protections for Section 8. HUD does not approve plans, except for local or residency preferences, but an owner must fix a plan HUD finds out of line. A list may close for a unit size when the average wait is excessive, such as a year or more. The owner then publishes a notice of the closing and announces the reopening the same way.

LIHTC has no single federal template. 26 CFR 1.42-9(a) requires units to be rented consistent with HUD nondiscrimination policy and points to Handbook 4350.3. Waiting list and plan details come from your state agency, so read its requirements before you write the plan.

What Is the Difference Between Section 8 Vouchers and Project-Based Section 8?

A voucher follows the household. Project-based Section 8 follows the building. Both are called Section 8, and they run on different paperwork.

The Housing Choice Voucher program is run locally by public housing agencies. HUD describes the key feature as portability: the ability to move and bring your voucher to any community in the United States. A private owner who takes a voucher household works with the housing authority on rent approval and inspections.

Project-based Section 8, covered above, ties the subsidy to units through a HAP contract with the owner. When a resident leaves, the subsidy stays behind for the next eligible household. Project-based vouchers are a hybrid. A housing authority attaches voucher assistance to specific units, so the assistance is tied to the unit and not the tenant.

What Changes When a Property Converts Under RAD?

The Rental Assistance Demonstration, or RAD, lets a public housing project move to a long-term Section 8 contract. HUD's Notice H-2019-09 / PIH-2019-23, Revision 4, issued September 5, 2019, lets the housing agency choose project-based vouchers (PBV) or project-based rental assistance (PBRA). The rules change because the property leaves public housing. A PBV conversion follows the PBV rules in 24 CFR part 983. A PBRA conversion follows 24 CFR part 880, as modified in the notice, with a 20-year initial HAP contract and a 20-year RAD Use Agreement.

Revision 4 stays in effect until HUD amends, supersedes, or rescinds it, and we found no Revision 5. HUD has added supplemental notices, so check HUD's RAD page before you rely on a rule for a specific file.

Program	Who runs it	What the subsidy follows	Core form or system
LIHTC	State housing credit agency, IRS	The building and its set-aside	Annual income certification, Form 8823 for noncompliance
HUD project-based Section 8	HUD, owner under a HAP contract	The unit	HUD-50059 through TRACS, EIV
Housing choice voucher	Local public housing agency	The household	Agency-run recertification
USDA Rural Development	USDA servicing office	The property and its loan	Form RD 3560-8, MINC

Operators who see both voucher and LIHTC households in the same building have to keep the two sets of rent math apart. Our waitlist management guide covers how the front door of that process works.

How Does USDA Rural Development Compliance Work?

USDA Rural Development compliance covers rural rental housing financed by the agency, most often Section 515 loans. Under 7 CFR 3560.152, a tenant has to be in a very low, low, or moderate-income household, or meet the rules of another program such as Section 8 or LIHTC while receiving those benefits. Tenants certify before moving in and recertify at least annually.

The occupancy rules live in handbook HB-2-3560, with tenant eligibility and income certification in Chapter 6. Owners certify on Form RD 3560-8, and USDA published an updated version on December 6, 2024, for certifications effective July 1, 2025 or later. Tenant data goes to USDA through MINC, with monthly transmissions due by the 10th.

The properties are small and often remote, with lean staff and one manager covering several sites. That changes which tools work. Our guide to USDA Rural Development compliance software goes through MINC, budgets, and the RD forms in detail.

What Is HOTMA and When Does It Apply to Each Program?

HOTMA is the Housing Opportunity Through Modernization Act. It changes how income, assets, and deductions are counted for federally assisted housing, and each program has its own start date. The big shifts are a net asset limit, new rules on what counts as asset income, a higher medical expense threshold, and updated interim recertification triggers.

Program	HOTMA date	Source
USDA Rural Development	July 1, 2025	RHS Stakeholder Announcement, June 24, 2025
HUD Multifamily	January 1, 2027, with a delay signaled	Notice H 2025-07
Public housing and vouchers (PIH)	January 1, 2027 for remaining provisions	Notice PIH 2026-15, May 14, 2026
LIHTC	Set by each state agency	State housing finance agency

HUD's Multifamily HOTMA page lists January 1, 2027 for full compliance. HUD staff said in September 2026 that a notice moving Multifamily to January 1, 2028 is coming, so check that page before each certification. Until the compliance date, a Multifamily owner follows the pre-HOTMA rules in Handbook 4350.3.

For LIHTC, the IRS has issued no HOTMA-specific guidance, and states pick their own timing. Some allowed early adoption starting January 1, 2024. The HUD net asset limit applies to public housing and Section 8 only, not to LIHTC or Rural Development.

The details, including the 2027 asset limit and deduction amounts, live in our post on what is hot with HOTMA. If you are comparing tools, our HOTMA compliance software comparison lays out what each vendor says on its own site.

What Does a Compliance File Review Check?

A file review checks that a sample of tenant files proves each household was eligible and each rent was right. Reviewers read evidence. A correct decision with no paper behind it still counts as a finding.

The reviewer depends on the program. A state agency reviews LIHTC files at least once every 3 years. HUD can review Multifamily properties for how they handle certifications, EIV, and rent math, and USDA servicing offices review RD files. Across all of them, the same items come up again and again:

• A signed, dated certification for each year.
• Income and asset verifications that were still valid on the certification date.
• Rent that matches the current utility allowance and program limits.
• Required notices, such as the VAWA notice of occupancy rights.
• Student status, household composition, and interim changes recorded when they happened.

Our post on how to prepare affordable housing files for review turns this list into a working routine. When a review does turn up errors, certification corrections shows how to fix a file the right way.

Elmington, a Nashville operator with more than 35,000 units, used to see applications come back with 3 to 5 rounds of compliance corrections. After centralizing on Fortress OS and AffordaPortal, file errors dropped by 75%. File review readiness works best as a daily habit. A panic week before an audit is the expensive way to do it.

What Is a HUD Management and Occupancy Review?

A Management and Occupancy Review, or MOR, is an on-site review a contract administrator runs on a HUD project-based Section 8 property. HUD's final rule of June 27, 2022, effective September 26, 2022, says MORs evaluate management, oversee HUD-assisted projects, and check owner compliance with HAP contract requirements. HUD's responses in that rule describe a review with a physical component, a financial management and procurement component, and a tenant file check. The reviewer reads each sampled file back to the previous MOR, so a 36-month gap means 3 years of paper.

The next MOR lands within 12, 24, or 36 months of the last one, depending on the property's HUD risk rating and its MOR score. Scores run on a scale from Superior down to Unsatisfactory. HUD also requires an MOR within 6 months of a change in ownership or management. To prepare, run the file-review routine all year, and write down the date each certification, EIV report, and verification was done. A reviewer going back three years finds the gaps fast.

How Do Layered Properties Run Several Rule Sets at Once?

A layered property runs several rule sets by tracking each funding source separately on the same household file. A building with LIHTC, project-based Section 8, and a USDA loan can test one resident three ways. Each test has its own income limit, its own form, its own certification date, and its own reviewer.

The HOTMA dates make it harder. In 2026, that same household can be on HOTMA math for the RD layer, on pre-HOTMA 4350.3 math for the HUD layer, and on whatever your state agency has adopted for the tax credit layer. Always write down which rule set governed which file.

Layered files go wrong in four common ways:

• Using one income figure for every program when the programs count income differently.
• Applying HOTMA numbers to a HUD Multifamily certification before its compliance date.
• Letting a utility allowance go stale between annual updates.
• Missing an interim change because the household reports to one funder and not the other.

Software that treats a property as one timeline will fail on all four. Fortress Compliance tracks each funding source on its own clock, and the Fortress OS platform handles LIHTC, HUD, RD, HOME, and layered program compliance in one system, as described on our affordable housing property management software page. Across on-site workflows in general, automation tends to save somewhere around 3 to 5 hours a week per employee. That is a general benchmark and not a promise for any one task.

When Should You Not Buy Compliance Software?

Skip the software if you run one property under one program and your current process passes review. A spreadsheet with a clean calendar can be enough at that size. The same goes for a messy data set. Migrating dirty files into a new system gives you the same mess in a nicer font, so clean the data first.

Software starts to pay off when a team spends real hours re-keying data, chasing documents, or tracking more than one funder. That is the point where a missed date turns into a finding. If you reach it, ask every vendor, including us, to show the boring screens in a demo: a recertification calendar, a failed verification, a utility allowance change, and a report that splits one household across programs.

Where Can You Get Help With the Details?

This guide gives you the shape of each program and the HOTMA dates as of October 12, 2026. It does not replace written guidance from your agency, HUD field office, or state housing finance agency, and it will not catch every quirk of your regulatory agreement.

When a file sits near a threshold or a property spans funders, ask your compliance officer or a certified occupancy specialist before you sign. Software can flag a rule. It cannot sign your 50059.