Final reconciliation legislation signed into law on July 4, 2025 (the Act), changes the calculations and qualification criteria for the low-income housing tax credit.

Current law

Taxpayers can claim the low-income housing credit annually over 10 years for costs associated with building or rehabilitating rental housing for low-income tenants. To qualify, a low-income building must either receive a credit allocation from the state allocating agency or be financed with proceeds from certain tax-exempt bonds, subject to the volume limit for private activity bonds. The total number of housing credits available for allocation by a state is capped by the state housing credit ceiling, which is determined by several components, including the unused carryforward component, population component, returned credit component, and national pool component.

For non-federally subsidized construction of new housing and substantial rehabilitation of existing housing (i.e., the project receives a state credit allocation), the credit is calculated so that its present value equals at least 70% of a building's qualified basis (referred to as 9% credits). For federally subsidized construction of new housing, substantial rehabilitation of existing housing and certain housing acquisition costs (i.e., the portion of a rehabilitation project that is purchased), the credit is calculated so that its present value equals at least 30% of a building's qualified basis (referenced as 4% credits).

New law

The Act permanently increases the state housing credit ceiling for purposes of the 9% credit by multiplying the dollar amounts for those years by 1.12. It also adjusts the requirement for tax-exempt bond financing for purposes of the 4% credit to allow additional buildings to qualify for housing credits without needing a state credit allocation. Specifically, buildings will qualify for 4% credits if at least 25% of the aggregate basis is financed by qualified obligations, with certain conditions.

Effective date

The increase in state housing credit ceilings is effective for calendar years after 2025. The modifications to the tax-exempt bond financing requirement will apply to buildings where the tax-exempt financing was issued after December 31, 2025.

Implications

Increasing and making permanent the amount of 9% credits "allocated" under a state's housing credit ceiling by 12% should help provide additional project financing once the credits are monetized. While some of that additional financing will be utilized to cover increasing construction and rehabilitation costs, the additional tax credits mean more units are likely to be generated than would have been otherwise.

The reduction in the percentage of the aggregate basis financed by qualified obligations from 50% to 25% will allow states to stretch their private-activity-bond-volume limit further, potentially doubling the number of affordable housing projects provided under the 4% program. The increased eligibility for 4% credits, however, will also come with the need to secure 25% of project costs from other sources.

Both of these changes may generate significantly higher production of affordable housing units at a time when there is incredible demand for affordable rental housing across the country.