The One Big Beautiful Bill act, signed into law in July of 2025, made several key changes to Low Income Housing Tax Credit (LIHTC) allocations and programs. The changes are expected to be largely positive for affordable housing developers, creating permanent enhancements to LIHTC financing, updated policy on bonus depreciation returns, and an extension on the New Markets Tax Credit program. Reductions in the bond financing threshold for 4% LIHTC projects is especially significant, paving the way for more affordable housing projects.
Here’s everything you need to know about the bond financing changes implemented by the Big Beautiful Bill, and how affordable housing developers can best take advantage of new legislation while building their portfolios.
What Just Changed—and Why?
Key provisions of the One Big Beautiful Bill are expected to reshape affordable housing development in states across the country, with the aim of boosting production and increasing supply. Programs affordable housing developers have leveraged successfully in the past are getting permanent extensions, and new incentives will also be rolled out.
Among the major changes, affordable housing developers can expect to see:
- The bill permanently lower the private activity bond (PAB) financing threshold from 50% to 25% of land and building costs
- A permanent, 12% increase in every state’s allocation of 9% LIHTC
- Bonus depreciation returns for furniture, fixtures, equipment, and landscaping
- A permanent extension of the New Markets Tax Credit Program
What Is the LIHTC 50% Bond Test?
Before getting into the changes in the bill, it’s essential to understand how the 50% test currently functions in affordable housing development financing.
The Low-Income Housing Tax Credit (LIHTC) is a tax benefit affordable housing developers claim over a 10 year period. The 9% credit offers a credit of 9% eligibility over the 10 years, while the 4% credit offers an annual credit of 4% eligible basis over the 10 years. Each year, a limited number of 9% credits are available based on allocations to state housing agencies made by the Internal Revenue Service (IRS.) 4% credits are offered as an alternative, made available when a certain specified percentage of a project’s aggregate basis is financed with private activity bonds (PABS) that have a specific allocation of volume cap from the state government.
In the past, a project qualified for a 4% credit if 50% or more of the building or land was financed with PABs. The One Big Beautiful Bill will lower the threshold to qualify for a 4% credit, paving the way for more developers to use tax credits to offset affordable housing costs.
Reduction of 50% Bond Test Threshold Required for 4% Credit
The One Big Beautiful Bill (OBBB) lowers the private activity bond (PAB) financing threshold from 50% to 25% of land and building costs for properties placed in service after December 31, 2025, as long as 5% of the aggregate and land costs are financed by PABs issued after that date. The changes are expected to dramatically increase the volume cap of tax-exempt bonds, and the reduction is considered a major win by affordable housing advocates. “The lower bond test and the increased amount of 9% credits is a generational, advocacy win for affordable housing,” Stockton Williams, executive director of the National Council of State Housing Agencies (NCSHA), said following the passing of the legislation.
9% LIHTC Allocation Increased
Every state is allocated per year, and the IRS determines each state’s allocation annually with adjustments for inflation. The OBBB permanently increases each state’s allocation for LIHTC to 12% starting in 2026. The increase is a slight change from the 2017 Tax Cuts and Jobs Act, which included a provision that raised state allocations for housing credits to 12% from 2018 to 2021. New allocations in the OBBB are expected to drive an additional $1 billion in LIHTC equity over the first year.
100% Bonus Depreciation Returns
The OBBBA extends and expands bonus depreciation, sometimes called first year depreciation, which allows developers to immediately deduct portions of the cost of qualifying assets instead of spreading the deduction out over their useful life using depreciation schedules. 100% Bonus depreciation is codified by the OBBA allows for businesses to immediately deduct the cost of qualifying property including furniture, fixtures, equipment, and land improvements in the year the asset is placed into service. Owners can expect several key benefits from the updated policy, including a reduction in tax liability for the current year, cast tax savings for debt reduction, and improved IRR on capital projects. Properties placed into service after January 19, 2025 will qualify for 100% bonus depreciation returns moving into the new year.
New Market Tax Credit Program Receives Permanent Extension
The New Market Tax Credit (NMTC) program is meant to incentivize commercial real estate developers to build in low-income communities. Under the prior legislation, the NMTC program was temporary and set to expire at the end of 2025. The OBBB extends the legislation indefinitely, funding the tax credit program at $5 billion annually. Unlike other affordable housing initiatives which rely on government lending capacity, New Market Tax Credits leverage private investment to fund public-serving projects, allowing for an approach where private equity can be leveraged to address community development news. Funding of the NMTC program thus shows legislative confidence in market solutions to community development concerns.
Implications for Developers
The OBBB’s changes are expected to be a net positive for developers and investors working in the affordable housing sector. States receiving more funds to allocate to 9% LIHTC and the lowered bond financing threshold for 4% LIHTC means more projects can get funded through every program. Programs such as the NMTC and Bonus Depreciation offerings create additional cost savings that will make a major difference in the difficult market pervading the ecosystem in the last couple of years. Owners and investors looking to take advantage of tax incentives should first evaluate which projects in the pipeline will be placed into service in the qualifying window for the new bond financing thresholds or bonus depreciation policies, then [add in final steps here].
Leveraging Technology to Meet New Opportunities
Even with the expanded opportunity afforded by federal legislation, the fundamental challenges facing affordable housing developers in the current environment remain. Developers looking to take advantage of tax credit programs will still need to make it through a complex application process, budget with accurate financial forecasts to prevent unforeseen costs, and compete for equity amid slow deployment. Modern real estate development software like Northspyre is built to help developers overcome obstacles while pursuing complex projects, and is uniquely suited to help you make the most of opportunities in the affordable housing space.
Northspyre’s Complex Capital Management solution ensures developers can simplify projects with complex requirements, with specific functionality to boost LIHTC compliance. The platform turns essential LIHTC compliance processes and cost certification into automated workflows. Northspyre simplifies LIHTC compliance tracking by forecasting tax exempt bond funding for eligible budget lines, tack sources for the draw period, and meet cost certification.
You can also use the platform to prepare reliable draw reports that satisfy tax credit requirements and keep affordable housing projects on track and compliant. Developers looking to pursue affordable housing projects funded in part by LIHTC tax credit programs can offer financial partners increased clarity and confidence as capital is deployed.
Book a demo and learn more about how Northspyre can help you deliver LIHTC projects on time and on budget.
