With the passage of the One Big Beautiful Bill (OBBBA) on July 4, 2025, Congress enacted the most significant expansion of housing incentives in more than two decades. For developers, investors and capital providers, this means new tools, more flexibility and a broader opportunity set.
At the heart of the legislation are updates to the Low-Income Housing Tax Credit (LIHTC) program, alongside permanent extensions to the Opportunity Zone (OZ) and New Markets Tax Credit (NMTC) incentives. Analysts estimate these changes could support the creation of up to 1.2 million additional affordable housing units over the next decade. According to Novogradac, the LIHTC enhancements alone could finance 1.22 million new affordable rental homes between 2026 and 2035.
We’re looking at the most significant expansion of affordable housing incentives in a generation. But incentives alone don’t build housing. People do.
Opportunity doesn’t always mean simplicity, though. These changes introduce new tools, but also new complexities. The topic surfaced in several conversations at the 2025 Texas Affiliation of Affordable Housing Providers (TAAHP) conference, held in Austin July 21-23, offering a timely lens into how industry professionals are beginning to interpret and respond to the new policy landscape.
What Changed? Here are the key provisions at a glance.
Lower Bond Financing Threshold
The most impactful change is the reduction of the 50 percent “financed-by” test for 4 percent LIHTC deals to 25 percent. To qualify, at least 5 percent of a project’s aggregate basis must be financed by bonds from an issue dated after Dec. 31, 2025, and the building must be placed in service in a taxable year beginning after that date.
This shift is expected to significantly expand the number of projects that can qualify for 4 percent credits, especially in states with limited private activity bond (PAB) caps.
At the TAAHP conference, the mood around this change was mixed. While many attendees agreed it could unlock more deals, there was uncertainty about how states would implement it and how developers would fill in the financing gap.
12 Percent Increase in 9 Percent LIHTC Allocations
Starting in 2026, states will receive a permanent 12 percent boost in 9 percent LIHTC allocations. This is a meaningful increase, especially since the 9 percent credit is oversubscribed in all states.
The increase applies to both the per-capita allocation and the small-state minimum, giving state agencies more flexibility to fund additional deals.
100 Percent Bonus Depreciation Returns
OBBBA restores permanent 100 percent bonus depreciation for qualified property acquired after Jan. 19, 2025, with a transitional election for property placed in service in the first taxable year ending after that date.
This change improves investor yield and could enhance equity pricing, though its impact will vary by deal structure.
Sunset of Section 45L Energy-Efficient Home Credit
Section 45L of the internal revenue code provided builders and developers with a per-unit tax credit for constructing or substantially rehabilitating residential buildings that met specified energy-efficiency standards. The 45L credit ends for homes acquired after June 30, 2026. For rental housing, “acquired” means the first lease.
Because the credit is calculated on a unit-by-unit basis, partial lease-up before the deadline can still preserve some equity. There are no transition rules or safe harbors — this is a hard stop.
Opportunity Zones and NMTC Made Permanent
In rural OZs, the substantial improvement threshold drops to 50 percent of adjusted basis (down from 100 percent), and investors receive a 30 percent basis step-up after five years. In other words, investors can qualify for major tax benefits by improving properties at half the usual cost, and after five years they get a 30 percent boost in their investment value for tax purposes.
The U.S. Department of Treasury will refresh designations every 10 years and require new reporting, including public impact data on jobs, housing units and income levels.
New Markets Tax Credit (NMTC): The OBBBA made the NMTC program permanent at $5 billion annually, allowing unused credits to roll over for five years. This gives properties, such as mixed-use developments, reliable, long-term funding that supports LIHTC-funded housing.
Additional Developments Outside the Bill
The Federal Housing Finance Agency (FHFA) has doubled GSE LIHTC equity capacity. Separately from OBBBA, FHFA announced in July 2025 that Fannie Mae and Freddie Mac can each invest up to $2 billion annually in LIHTC equity (previously $1 billion each).
Half of this combined $4 billion is reserved for difficult-to-serve markets, and at least 20 percent of that half is earmarked for rural communities. This is a regulatory action, not part of the bill itself, though FHFA described it as aligned with OBBBA’s goals.
What These Changes Mean in Practice
Does the lowered bond financing threshold really change the game? Yes and no. Reducing the threshold from 50 to 25 percent means more developers can now access 4 percent credits. That opens the door for more affordable housing deals to qualify, which is especially important in a high-cost or complex capital stack environment. But it also introduces new challenges.
At the TAAHP conference, the mood was one of cautious optimism:
- Supportive voices saw the potential for expanded deal flow, especially in high-cost markets.
- Skeptics flagged financing gaps: projects may still need taxable debt or soft financing, which is difficult to secure.
- Practical observations: Some developers already structured deals below 50 percent bonds and repaid them quickly; for them, this simply formalizes a common approach.
Developers are also exploring creative bond structures like cash-backed forward executions. These approaches can reduce interest costs and generate additional equity but come with increased costs and require close coordination with bond counsel and investors.
What does the FHFA Expansion Mean for Rural Deals?
With $4 billion in annual LIHTC equity now available and a significant portion reserved for rural and underserved markets, developers in these areas may find new feasibility where deals previously stalled.
What Could Get in the Way? While the new rules are promising, several real-world challenges could limit their impact.
- Construction cost inflation and tariffs continue to pose headwinds. Rising material and labor costs are putting pressure on budgets, and tariff-related uncertainty adds another layer of complexity.
- Slowing rent growth is forcing underwriters to adjust assumptions. As rent growth slows down in many markets, feasibility becomes harder to achieve.
- LIHTC equity pricing is another wildcard. Some expect increased investor interest to push pricing up, while others worry that market volatility could dampen demand.
- Financing gaps will depend on access to soft funding. Experts emphasized the importance of local relationships, nonprofit partnerships and programs like HOME, CDBG and AHP grants to make deals pencil out.
- State-level implementation will determine how benefits are realized. Each state will interpret and roll out the new provisions differently, which could create uneven access depending on qualified allocation plans and bond program guidance.
Final Thoughts
We’re looking at the most significant expansion of affordable housing incentives in a generation. But incentives alone don’t build housing. People do.
At the Texas conference, one theme that came through clearly was that success in this new era will depend not just on understanding the policy, but on leveraging local relationships, structuring creatively and securing soft funding.
Developers who act early, stay close to state-level guidance and build with long-term stewardship in mind will be the ones who turn this policy into progress.
Pamela Wilkes is Northmarq’s chief underwriter of affordable housing for Freddie Mac and Fannie Mae.