In a landmark update to the Low-Income Housing Tax Credit (LIHTC) landscape, the recently enacted One Big Beautiful Bill Act (H.R. 1) has officially halved the bond financing threshold from 50% to 25% to qualify for 4% LIHTC credits. This shift stands to accelerate affordable housing production in unprecedented ways.

Judith Crosby, an attorney in the tax credit group at Kutak Rock, commented on the change:

“The new 25 percent test is going to be a potentially large benefit . . . states with capped out PAB allocations stand to benefit the most.” (taxcreditadvisor.com)

She unpacks two key implications:

1. Relief for States with Exhausted Bond Capacity
   Many states have reached or exceeded their private activity bond (PAB) volume caps, which previously constrained new projects under the 50% test. By lowering the threshold to 25%, these states can now stretch their bond authority further, giving life to more projects that were parked due to CAP limitations.
2. Boost to Affordable Housing Pipeline
   The reduced requirement not only frees up PABs but also cuts waste. Developers previously leaned heavily on bonds to meet the higher threshold, even if their projects could not permanently support that much tax-exempt debt. The 25% test aligns bond use more closely with financial feasibility, enabling more efficient capital deployment and faster project execution.

Deals placed in service on or after January 1, 2026 will follow the new 25% rule. Projects closing before then must still meet the 50% threshold. Experts estimate reducing the “overhang” bonds opens up over $7 billion in annual new deals, much needed capital in a time of ongoing housing affordability challenges.

Strategic flexibility ahead. State agencies now have room to craft thoughtful bond allocation policies, balancing minimum thresholds, bond “cushions,” and full support of permanent debt, all with an eye toward maximizing impact.

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Judith's practice focuses on tax law, with particular expertise in affordable housing, partnership law, nonprofit law, and equity financing of partnerships and limited liability companies. She has represented investors, syndicators, credit agencies and developers and provided tax structuring advice in hundreds of tax credit transactions, including mixed-income projects, mixed-use projects, assisted living projects, single-room occupancy projects for homeless individuals, mixed-finance public housing, projects which are financed by a combination of Low-Income Housing Tax Credits (federal and state) and/or Historic Rehabilitation Tax Credits (federal and state) and Energy Tax Credits, as well as projects financed by the New Markets Tax Credit. Judith also provides general partnership and corporate tax advice on a range of issues, including choice of entity, tax-exempt entity formation and maintenance, tax-deferred exchanges of real estate and state tax.