The suggested policy - which would have been for taxpayer-funded shelters - was still being debated last autumn when Donald Trump was voted out of office.
But on Thursday, the Department of Housing and Urban Developement (HUD) announced it will be officially scrapped.
“Access to safe, stable housing — and shelter — is a basic necessity,” Marcia Fudge, the department’s new secretary under President Joe Biden, said.
"Unfortunately, transgender and gender non-conforming people report more instances of housing instability and homelessness than cisgender people.”
Announcing the move, she said the department was taking a “critical step” in affirming its “commitment that no person be denied access to housing or other critical services because of their gender identity”.
The HUD said the proposal would have weakened a rule ensuring individuals - regardless of sexual orientation and gender identity - have equal access to government-funded housing programmes.
But under Mr Trump and his housing secretary, Ben Carson, the US government put forward a change to the rule which would have allowed single-sex homeless shelters to deny transgender people access.
This proposal would have let shelter providers “subject transgender individuals to inappropriate and intrusive inquiries, deny them accommodations, and subject them to greater harassment”, the HUD said on Thursday.
Jennifer Wexton, a Democratic congresswoman who clashed publicly with Mr Carson over the issue in 2019, hailed its withdrawal as an expected but necessary step to ensure protections for one of the country’s vulnerable populations.
“Housing saves lives, especially for the trans community who face disproportionate rates of violence and homelessness,” she said, adding it was a “relief” to see the proposal officially off the table.
Kate Scott from Equal Rights Centre - a civil rights group fighting against discrimination in housing, employment public accomodation - welcomed the move on Twitter.
The organisation’s executive director said the department’s “change in position” would “literally save lives”.
The latest move on housing comes just weeks after the Biden administration reversed Trump-era rules banning transgender and non-binary individuals from serving in the US military.
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