Navigating the Low-Income Housing Tax Credit (LIHTC)

The low income housing tax credit just received its largest expansion in decades, and the timing could not be better for developers looking at affordable housing. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently expanded the program in ways that change how deals get financed, structured and priced. If you have been on the fence about an LIHTC project, 2026 is the year to take a serious look.

How the Low Income Housing Tax Credit Works

The LIHTC program gives investors a dollar-for-dollar reduction in their federal tax liability in exchange for financing affordable rental housing. That is a critical distinction from a deduction. A $100,000 credit wipes $100,000 off your tax bill, regardless of your bracket.

The IRS administers the program under Section 42, but state housing finance agencies are the ones who actually allocate credits to developers through competitive application processes. Each state creates its own qualified allocation plan (QAP) that spells out what types of projects get priority, and those priorities vary significantly from state to state.

There are two credit types. The 9% credit is the more valuable option, generally used for new construction and rehabilitation projects that don’t rely on other federal subsidies. The 4% credit pairs with tax-exempt private activity bonds and works well for acquisition-rehabilitation deals or projects where bond financing makes sense. Both deliver benefits over a 10-year credit period, but the paths to securing them are very different.

What Changed Under the OBBBA

Two provisions stand out. The law permanently increases each state’s annual 9% credit allocation authority by 12%, which means more credits available for competitive projects starting this year. It also permanently reduces the bond financing threshold for 4% credits from 50% to 25% of a project’s aggregate basis. That second change is arguably more impactful because it frees up bond volume in states that have been hitting their caps for years, opening the door for significantly more 4% deals to move forward.

The OBBBA also restored 100% bonus depreciation for property placed in service after January 19, 2025. When combined with a cost segregation study, this allows investors to front-load tax losses in the early years of a deal, which improves after-tax returns and can strengthen equity pricing.

Compliance Still Makes or Breaks a Deal

None of these benefits matter if you cannot stay compliant. The program requires a 15-year compliance period, often extended to 30 years at the state level. During that time, developers must meet one of three income set-aside tests. The most common options require either 20% of units to be occupied by tenants earning 50% or less of area median income (AMI) or 40% of units at 60% of AMI. A third option, income averaging, allows more flexibility by letting units serve tenants at varying income levels as long as the average across restricted units stays at or below 60%.

State agencies conduct physical inspections and file reviews at least every three years. They check income verification, rent calculations and property condition. Getting this wrong triggers credit recapture, which means paying back credits with interest. The placed-in-service timing rules also trip up developers. The 10-year credit clock starts when the building is ready for occupancy, not when it is fully leased. Missing that distinction can delay your first credit claim by a full year.

How Deal Structures Are Shifting

Most developers sell their credits through syndication, where syndicators pool credits from multiple projects and sell them to corporate investors. Banks looking to fulfill Community Reinvestment Act obligations remain the primary buyers, and pricing per credit dollar fluctuates based on factors like project location, deal structure and investor demand for CRA-qualifying investments.

The reduced bond threshold is creating new opportunities, but also new considerations. With less tax-exempt bond volume required per deal, developers may rely more heavily on taxable debt during construction, which carries higher interest rates. More 4% deals entering the market also means greater competition for gap financing and soft funding sources. Developers working in difficult development areas or qualified census tracts should note that projects in those areas can boost eligible basis by up to 30%, which can make the difference on tighter deals.

Make the most of LIHTC in 2026

The OBBBA has given developers and investors better tools to work with this year. More allocation authority, a lower bond threshold and restored bonus depreciation all improve the underlying economics of affordable housing projects. But the program’s complexity has not decreased. Between QAP scoring, basis calculations, syndication structures and long-term compliance, there are still plenty of ways for a deal to go sideways without experienced guidance. If you are evaluating an LIHTC opportunity or want to understand how the 2026 changes affect your current portfolio, contact a James Moore professional to connect with our Real Estate and Tax teams.

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