LIHTC News: Permanent Changes, 25% Bond Test, and Federal Bills

The Low-Income Housing Tax Credit program’s 2026 expansion, enacted through the One Big Beautiful Bill Act on July 4, 2025, permanently raised the annual pool of competitive 9% credits by 12% and cut the tax-exempt bond financing threshold for 4% credits from 50% to 25% of a project’s aggregate basis. Both changes took effect at the start of 2026. Novogradac projects they will finance 1.22 million additional affordable rental homes over the 2026–2035 decade, the largest expansion of the program in more than 25 years.¹

The Two Permanent Changes

The enacted law, Public Law 119-21, made two structural changes to the credit.²

The first raised the annual per-capita 9% credit allocation by 12% beginning in calendar year 2026. Because the ceiling adjusts each year for inflation and population, the increase compounds. The IRS published the 2026 figures in April: states receive the greater of $3.416 per capita or a small-state minimum of $3,953,600.³

The second, and the larger driver of new production, permanently reduced the tax-exempt bond financing threshold for 4% credits from 50% to 25% of aggregate basis. Under the old rule, a developer had to finance at least half of a building’s costs with tax-exempt private activity bonds to unlock the automatic 4% credit, and roughly $7 billion in bonds were issued each year solely to clear that test rather than to support permanent debt.⁴ Cutting the threshold to 25% lets states spread limited bond volume cap across far more projects.

Novogradac’s 1.22 million-unit projection splits sharply between the two provisions: roughly 1.14 million additional units are attributable to the bond-test reduction and about 80,000 to the 9% allocation increase. The estimate assumes that gap financing scales alongside the new equity and bond debt, and it excludes any tariff-related cost increases.⁵

One provision that appeared in the House-passed version did not survive. A proposed 30% basis boost for properties in rural and tribal communities was removed before enactment.²

How States Are Implementing the 25% Bond Test

The reduced threshold applies to properties placed in service after December 31, 2025. By early December 2025, 15 states had adopted final rules for the new test, and 18 more plus the District of Columbia were still drafting regulations.⁶

Most agencies are not pegging their allocation floor at exactly 25%. Seven states adopted initial policies setting allocations between 27.5% and 30% of aggregate basis, building in a cushion against the risk that cost overruns push a project below the federal minimum at placed-in-service. If that happens, the IRS reduces credits proportionally, which typically kills the deal. The District of Columbia Housing Finance Agency, for example, set its threshold at 30% of aggregate basis or the maximum supportable permanent debt, whichever is greater.⁷

The trade-off is straightforward. Less tax-exempt bond financing per project means more taxable debt in the capital stack. Taxable construction debt currently carries interest rates 60 to 100 basis points higher than tax-exempt alternatives, and many transactions lack the budget cushion to absorb that gap.⁴ Recycled bonds, previously issued private activity bonds redeployed to new deals, are expected to see heavier use as a workaround. But that supply is projected to fall 85% to 90% within three to four years, because far fewer projects will be financed at the old 50% level to generate them.⁶

About half of U.S. states are oversubscribed, consistently reaching their maximum bond volume cap. California is among the most constrained and issued comprehensive rules allowing developers to reduce bond amounts on existing projects in exchange for incentives such as increased developer fees. Tennessee, Washington, and Maryland permit allocations above the minimum threshold but impose hard caps.⁶

Credit Pricing and Investor Demand

More credits flowing into the market are pushing prices down. The average price paid per dollar of a 9% credit fell to 84 cents in the fourth quarter of 2025, from 87.2 cents a year earlier.⁸ The median net equity price reported for late 2025 and early 2026 was $0.843, described as moderately depressed compared to $0.860 in early 2025 and the historical highs of 2023 and 2024.⁹

In an early-2026 syndicator survey, 59% expected pricing to hold steady through the first half of the year and 41% anticipated a decline. None expected an increase.⁸ Projects in Community Reinvestment Act markets continue to command a premium, while secondary and tertiary markets face the most downward pressure.

Total investor equity closed into LIHTC funds and direct investments in 2025 reached approximately $30.1 billion, a 3.8% increase over 2024. CRA obligations remain the dominant driver, accounting for 71% of equity surveyed.⁹ That concentration is a known structural vulnerability. A 2024 Affordable Housing Tax Credit Coalition survey found 42% of LIHTC investment came from banks nearing the existing 15% public welfare investment cap.¹⁰

Fannie and Freddie Doubled Their LIHTC Caps

The Federal Housing Finance Agency moved in August 2025 to shore up the demand side. It authorized Fannie Mae and Freddie Mac to each invest up to $2 billion annually in LIHTCs, doubling their previous $1 billion individual caps and bringing the combined enterprise authorization to $4 billion.¹¹ Half of each enterprise’s investment must be reserved for difficult-to-serve LIHTC markets, and at least 20% of that portion must target rural Duty to Serve communities.¹² National Housing Conference CEO David Dworkin said the goal is to ensure the market can absorb additional credits without diminishing their value and to reach CRA deserts where bank investment is limited.

Federal Bills That Could Change the Math

The OBBBA was the main event, but Congress is still working on housing tax policy.

21st Century ROAD to Housing Act

The most advanced pending bill is the 21st Century ROAD to Housing Act (H.R. 6644). The House passed it 396-13 on May 20, 2026, and the Senate followed on June 22 by 85-5. As of late June 2026, the bill awaited the president’s signature.¹³

Its most LIHTC-relevant provision raises the statutory cap on bank public welfare investments from 15% to 20% of risk-adjusted capital and surplus, directly loosening the constraint on the program’s largest investor category. The act also lifts the Rental Assistance Demonstration program cap by 100,000 units, authorizes CDBG Disaster Recovery for three years, restricts large institutional investors from purchasing single-family homes, and creates a $200 million annual competitive grant for local governments that increase housing supply. It carries no new appropriations.¹³

Workforce Housing Tax Credit Act

Representatives Jimmy Panetta (D-CA) and Mike Carey (R-OH) introduced the Workforce Housing Tax Credit Act (H.R. 8626) on May 6, 2026, proposing a new companion credit for middle-income renters: a 5% rate for state-allocated projects and a 2% rate for bond-financed properties, with at least 60% of units occupied by households at or below 100% of area median income. States would receive $1 per capita annually, with a $1.5 million small-state minimum and an additional 5% allocation for rural areas.¹⁴ Developers could combine WHTC and LIHTC in the same project, and states could transfer unused WHTC allocations to LIHTC at any point during the year. Novogradac estimates the credit would finance approximately 344,000 rental homes.¹⁵

Affordable Housing Credit Carryback Act

Carey and Panetta also introduced H.R. 9012 on May 22, 2026, which would extend the LIHTC carryback period from one year to five, letting investors apply current-year credits against tax liability from earlier years.¹⁶ A 2009 Ernst & Young study commissioned by Enterprise Community Partners and the Local Initiatives Support Corporation found this was the single reform most favored by investors and syndicators, with respondents projecting a 37% increase in expected investment.¹⁷ The bill has not yet been considered in committee.

DASH Act

Senator Ron Wyden (D-OR) and Representative Val Hoyle (D-OR) introduced the Decent, Affordable, Safe Housing for All Act in June 2026. The broader package would strengthen the LIHTC, establish new renter and middle-income housing tax credits, create an advanceable down payment credit for first-time home buyers, and expand Housing Choice Vouchers.¹⁸

State Responses in 2026

States have been busy aligning their own rules with the federal expansion. A sample of 2026 activity:³

Wisconsin’s governor signed A.B. 182 in April, requiring the state housing authority to set aside at least 35% of annual state LIHTCs for rural areas.
Maine extended its state affordable housing tax credit sunset from 2028 to 2036, keeping a $10 million annual cap.
Michigan lawmakers introduced multiple bills to create state-level housing tax credits, with proposed caps ranging from $42 million to $100 million.
The District of Columbia clarified that LIHTC-financed rental housing is exempt from the district’s rent stabilization program.
California’s A.B. 2689 would allow LIHTC properties to refuse lease renewals for households earning more than 140% of AMI for two consecutive years.
New York’s S 9571 proposes allowing the transfer and re-transfer of state LIHTCs.

Expiring Affordability Restrictions Are a Separate Problem

The 2026 expansion adds new supply, but it does not address units aging out of the program. Between 2024 and 2035, an estimated 845,000 LIHTC units are scheduled to lose their affordability requirements as their 30-year restriction periods expire. As of December 2023, roughly 2.46 million units were actively subject to LIHTC rent restrictions.¹⁹ Whether owners recapitalize with new credits, accept extended use commitments, or convert to market rate depends on local market conditions, mission-driven ownership, and state-imposed requirements beyond the federal minimum.

What to Watch

State agencies and syndicators are absorbing a surge in deal flow with existing staff, and capacity constraints are already showing.⁸ HUD published 2026 income limits in May with an average increase of 3.4%, capped at 10%, which determines the maximum rents LIHTC properties can charge.²⁰ Industry leaders have called for a secondary exchange to make it easier for smaller investors to participate, though no legislation or administrative action has been taken on that front.²¹

If the 21st Century ROAD to Housing Act is signed, the higher bank PWI cap could meaningfully expand investor capacity at a moment when it is needed. A workforce housing credit, if it advances, would extend the model to households earning up to 100% of AMI for the first time. And the five-year carryback proposal addresses what investors and syndicators have long identified as a leading barrier to broadening the funding base beyond CRA-motivated banks. Regardless of which of those bills becomes law, the permanent statutory changes already on the books put the LIHTC program into its largest production phase since its creation in 1986.

1
Tax Credit Coalition. Reconciliation Bill Containing Historic Low-Income Housing Tax Credit Investment Signed Into Law
2
Baker Tilly. What One Big Beautiful Bill Act Means for LIHTC
3
Novogradac. Low-Income Housing Tax Credits News Briefs June 2026
4
Housing Finance Magazine. One Big Beautiful Bill Examining the Bond Financing Change
5
Novogradac. Senate Finance Committee Releases FY 2025 Budget Reconciliation Bill
6
Tax Credit Advisor. 2026 25 Percent Test Guide
7
DCHFA. 25 Test Policy Notification
8
Housing Finance Magazine. Syndicators Enter 2026 With Cautious Optimism
9
Tax Credit Advisor. Housing Tax Credit Monitor March 2026
10
Novogradac. House Passes Housing for the 21st Century Act
11
ABA Banking Journal. FHFA Raises Caps for Fannie Freddie Rental Housing Investments
12
Housing Finance Magazine. FHFA Doubles LIHTC Cap for Fannie Mae and Freddie Mac
13
Bipartisan Policy Center. Inside the Deal: What’s in the Final 21st Century ROAD to Housing Act
14
Rep. Panetta. Rep Panetta Introduces Bipartisan Legislation to Increase Workforce Housing
15
Novogradac. House Members Introduce Bipartisan Bill to Create Workforce Housing Tax Credit
16
GovTrack. H.R. 9012: Affordable Housing Credit Carryback Act
17
NLIHC. Study Examines LIHTC Problems and Reform Proposals
18
NCSHA. NCSHA Washington Report June 26 2026
19
Federal Reserve Bank of Chicago. LIHTC Affordability Requirement Expirations
20
Novogradac. Affordable Housing Tax Credits News
21
Housing Finance Magazine. Making the Low-Income Housing Tax Credit Work Even Better