Inside OBBBA’s LIHTC Provisions: Drilling Down to the Real-World Consequences

This article was originally published on Affordable Housing News. View it here.

It has been a long time coming. Both the Affordable Housing Tax Credit Coalition and the National Multifamily Housing Council have long advocated for expanding
and improving the low-income housing tax credit (LIHTC) program. Their reasons were straightforward: Not only is it an extremely efficient use of taxpayer dollars, but it is also the primary driver of affordable housing construction in the United States. The equity that developers raise by selling their tax credit allocations is a low-cost source of funding that allows them to offer more affordable rents.

The LIHTC program was established by the omnibus Tax Reform Act in 1986. Although an Affordable Housing Credit Improvement Act (AHCIA) had been introduced in every session of Congress since 2016, it took another omnibus bill, the One Big Beautiful Bill Act (OBBBA),  for these changes to become law.

Among the LIHTC-related changes enshrined in OBBBA is a permanent 12% increase in the annual allocation to states of 9% credits, typically used for new construction. OBBBA also reduced the tax-exempt bond threshold needed to qualify for 4% credits used for building and preserving affordable communities from 50% to 25% of a project’s aggregate basis (including land and buildings). The act also reinstated the 100% bonus depreciation for qualifying property, which enables investors to deduct a significant portion of a project’s cost in its first year, thereby improving the yield on their investment. While not specifically a LIHTC provision, increasing the allowable losses from bonus depreciation, which was being phased out, can lead to better equity pricing.

An Immediate Boost to Affordable Housing with More to Come

How much difference will the LIHTC provisions in OBBBA make? The 12% increase in the 9% allocation has the potential to increase new construction by 12%, though the increase in credits will likely result in some initial softness in the market depending on investor appetite. This could be mitigated by the Federal Housing Finance Agency’s (FHFA’s) recent approval to allow Freddie Mac and Fannie Mae to increase their LIHTC investments from $1 billion to $2 billion each in 2026.

The shift from a 50% test to a 25% test will likely have an even bigger impact. At the 50% level, the supply of tax-exempt bonds allocated by states to multifamily housing was nearly maxed out. That funding was oversubscribed in approximately half the states, and at parity in another 12. Under OBBBA, the roughly one-third of these bonds that had been used to help projects meet the 50% test will be available for other deals. However, if state agencies allocate just the 25% minimum in tax-exempt bonds for each deal, developers could face higher interest costs (thereby reducing debt available for their projects). The rates on taxable debt used to fill the gap are about 50 basis points higher than tax-exempt bonds, and soft funding will be harder to secure as states scale back due to cuts in other federal funding. One solution is for agencies to provide the greater of 30% in tax-exempt bonds or supportable first mortgage debt. In the short term, recycled private-activity bonds could also be used to keep funding costs lower.

It is possible that another aspect of OBBBA—the phasing out of the 45L new energy-efficient home credit and the 25D solar tax credit—may increase investor demand for the LIHTC to manage their tax liabilities. When these credits were enacted as part of the Inflation Reduction Act in 2022, their shorter investment requirements proved compelling, and a number of investors reduced their LIHTC purchases. Many of these investors may return to the LIHTC market.

There is a last caveat that applies to both new construction and preservation. It will take time for state housing agencies to ramp up their capacity to evaluate and allocate the credits and bonds to more projects, dampening the initial impact of the OBBBA provisions.

Current Conditions Favor Rehabilitation

The passage of time since the first iteration of the AHCIA was proposed also makes a difference in how these provisions play out in the marketplace. In 2016, core inflation averaged 2.2%. Today, it is 3.1%—and the cost of construction materials, according to Associated Builders and Contractors, has soared almost 40% since the beginning of the pandemic. Interest rates are also much higher. The average 10-year Treasury yield from 2016 to 2024 was 2.48%. In 2025, it ranged between 4.22% and 4.79%, though it has dropped steadily over the summer.

In other words, with higher rates, lower LIHTC pricing, and higher construction costs, deals are harder to pencil out now than they were when the AHCIA was first proposed. This will affect new construction even with the 9% credit. On the other hand, the new provisions offer a unique opportunity for rehab projects—particularly on those properties with existing low-rate Federal Housing Administration (FHA) funding. FHA’s 241(a) supplemental loan provides financing for repairs, additions, and improvements for projects with FHA-insured first mortgages or Department of Housing and Urban Development-held mortgages. When 50% of the project cost had to be funded with tax-exempt bonds, it could be challenging to leave the original funding in place. But with the new 25% threshold for 4% LIHTCs, retaining existing funding is much more feasible. Financing with the FHA 241(a) program can be used as a secondary source of funding, while leaving low-cost debt on deals refinanced during the pandemic can help fill gaps. The resulting blended rate would be attractive relative to other options.

Explore Your Options Now The introduction of the new LIHTC provisions in OBBBA is a meaningful opportunity to increase the supply of affordable housing in the United States and improve the lives of people living in these properties. For LIHTC investors and affordable housing developers, understanding how these provisions will play out in current economic conditions is still a work in progress. But one thing is certain: Those who master the variables now and act accordingly will be in a position to reap the most benefits.