The LIHTC 10% carryover test and placed-in-service deadline

Most 9% awards are made months or years before construction is finished. The tax code lets the agency allocate credit now to a building that will be placed in service later, but only if the project shows real progress quickly and finishes on a fixed clock.

The two tests

From IRC 42(h)(1)(E):

1. The 10% test. The building must be part of a project in which the taxpayer’s basis, as of the date that is 1 year after the date the allocation was made, is more than 10% of the taxpayer’s reasonably expected basis in the project as of the close of the second calendar year after the allocation year.
2. The placed-in-service deadline. The building must be placed in service not later than the close of the second calendar year following the calendar year in which the allocation is made.

Allocation date	10% test date	Placed-in-service deadline
March 15, 2026	March 15, 2027	December 31, 2028
October 1, 2026	October 1, 2027	December 31, 2028
December 20, 2026	December 20, 2027	December 31, 2028

The placed-in-service deadline depends only on the allocation year, so a December allocation gives far less building time than a January one. Agencies often set their own earlier dates in the carryover agreement for submitting the 10% certification, so the federal date is the outside limit, not the working one.

A note on the regulation. 26 CFR 1.42-6(a)(2) still describes the pre-2008 deadlines (the close of the calendar year for allocations before July 1, six months after allocation for later ones). The Housing and Economic Recovery Act of 2008 changed the statute to the one-year rule above. The statute controls; follow it and your agency’s carryover agreement.

What counts as basis for the test

26 CFR 1.42-6(b) defines carryover-allocation basis:

Counts	Doesn’t count
Adjusted basis in land reasonably expected to be part of the project	The 130% QCT/DDA boost (excluded from both the numerator and the reasonably expected basis)
Depreciable property, whether or not it will be in eligible basis (commercial space counts)	Costs not yet paid (cash method) or not properly accrued (accrual method)
Capitalizable costs incurred before the allocation year	Fees that are unreasonable, not legally owed, paid to the taxpayer itself, or that a related cash-method payee couldn’t accrue
Nonrefundable deposits or option payments that are capitalizable into land or building	Amounts that won’t be capitalized into the project

Worked example

Assumptions only: allocation dated June 1, 2026. Reasonably expected basis at December 31, 2028 is $25,000,000, of which land is $2,000,000 (the boost is ignored). The 10% threshold is more than $2,500,000, measured June 1, 2027.

Basis incurred by June 1, 2027	Amount
Land (closed and paid)	$2,000,000
Architecture and engineering paid	$450,000
Permits and impact fees paid	$180,000
Developer fee earned and accrued (reasonable, owed, accrual-method)	$300,000
Total	$2,930,000
Test: more than 10% of $25,000,000?	Yes, 11.7%

If the land were held under an option instead of owned, only the capitalizable option payment would count, and the project would fail. Many developers close on land before or shortly after allocation for exactly this reason.

What the carryover document must say

A carryover allocation isn’t made by Form 8609, because the building isn’t in service yet. The allocating document is the agency’s carryover agreement, and under 26 CFR 1.42-6(d)(2) it is valid only when an authorized agency official has completed, signed and dated it with:

1. the address of each building (or a specific description of its location);
2. the taxpayer’s name, address and taxpayer identification number;
3. the agency’s name, address and taxpayer identification number;
4. the date of the allocation;
5. the housing credit dollar amount allocated to the building or project;
6. the taxpayer’s reasonably expected basis in the project, land and depreciable, as of the close of the second calendar year after the allocation year;
7. the date each building is expected to be placed in service; and
8. the building identification number (BIN) for each building.

The regulation is explicit that an unsigned or undated carryover, or one missing a required item by the close of the calendar year, is treated as if it had never been made (1.42-6(a)(1)). Read the document against this list the week you receive it, while the agency can still fix it in the same year.

Why the reasonably expected basis matters

The denominator of the 10% test is a projection, and it’s fixed in the carryover document. Overstating it makes the test harder to pass; understating it can look like gaming. Use the same budget that supports the credit request, with land and all depreciable costs (including ones outside eligible basis) and without the 130% boost. If costs later rise, the test isn’t rerun, but the larger final basis doesn’t raise the credit either: the credit is capped at the allocated amount on the carryover and later on Form 8609, Part I, line 1b.

Proving it

Agencies require a 10% certification package, typically:

• a CPA’s report or attorney’s opinion on the basis incurred and the reasonably expected basis;
• a schedule of costs with invoices and proof of payment;
• evidence of land ownership or a ground lease;
• the project budget used for reasonably expected basis.

Keep the support. The IRS can examine the carryover allocation years later, and an invalid carryover means the credit was never validly allocated.

Project-based allocations for multi-building deals

For a project of several buildings, the agency may allocate on a project basis under 42(h)(1)(F). The 10% test is then measured for the whole project (1.42-6(a)(2)), and the allocation applies to buildings placed in service during or after the allocation year. Each building still needs its own Form 8609 and BIN.

When construction runs late

Problem	Options
10% test at risk	Close on land early; pay (not just accrue) design costs; confirm fee accruals with the CPA; ask the agency whether its internal deadline is earlier than the statute’s
Placed-in-service deadline at risk	Phase the work so individual buildings are placed in service first; for multi-building projects, check how the project-based allocation treats later buildings; talk to the agency early about its options
Deadline will be missed	The credit goes back; the agency may let you reapply. Investors’ partnership agreements usually give them a put right or price reduction in this case

“Placed in service” for a residential building generally means the date the first unit is ready and available for occupancy under state and local law, usually the date of the first certificate of occupancy for that building. Investors and lenders will each set their own conditions around that date, because the credit period starts in the placed-in-service year or, at the owner’s election, the following year (42(f)(1)).

Why lenders care

Construction lenders and bridge lenders on 9% deals treat the placed-in-service deadline as a hard maturity: if it’s missed, the equity that repays them can disappear. Expect a completion deadline in the loan that is earlier than the federal date. The Janover Capital desk can structure construction and bridge maturities around your carryover dates.