In the face of growing housing shortages, rising construction costs and limited public resources, the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21) could be a game-changer. This legislation introduces major reforms aimed at expanding access to affordable housing and reshaping the financial dynamics of the Low-Income Housing Tax Credit (LIHTC) program.

With permanent changes like increased 9% credit allocations, expanded bond capacity and the return of 100% bonus depreciation, OBBBA offers long-sought tools to boost affordable housing development and investment. But it's true impact will depend on how quickly the industry adapts.

From developers and investors to state agencies and lenders, stakeholders will need to recalibrate. With this in mind, let’s break down three of OBBBA’s most significant changes – and why they matter.

A boost to the 9% credit: Increased allocations, modest gains

One of the most headline-grabbing provisions of the OBBBA is the permanent 12% increase in annual 9% LIHTC allocation authority, beginning in 2026. This long-anticipated change increases each state’s per capita credit ceiling, translating into additional affordable housing projects annually.

To put this into perspective: In 2025, the per capita 9% credit allocation was $3.00. If that increases marginally to $3.05 in 2026 (consistent with past trends), the 12% boost could lift the per capita rate to roughly $3.40. In real dollars, for example, California, with approximately $116 million in 2025 allocation, would see an increase of nearly $14 million.

While that amount won’t flood the market, it will create capacity for additional deals, particularly in states with larger populations and strong development pipelines.

The market is expected to absorb this new supply readily, as 9% deals are typically more appealing to investors due to their simpler capital stacks, stronger credit-to-loss benefit and more straightforward debt structures. These factors drive demand and pricing stability, even as allocations increase.

However, the added capacity, while welcome, will not dramatically shift production levels. In fact, we expect most of the increase in LIHTC supply will come not from the 9% boost, but from the reduction of the 50% test to 25% for 4% deals. That’s where the real volume potential lies.

Lowering the 50% test to 25%: Unleashing the power of 4% credits

Perhaps the most transformative element of OBBBA is the permanent reduction of the bond test requirement from 50% to 25% of aggregate basis for 4% LIHTC projects. This provision removes a major bottleneck that has historically constrained project volume in states that routinely hit their private activity bond (PAB) cap.

Starting in 2026, developers will only need 25% of a project’s basis to be financed with tax-exempt bonds to qualify for 4% credits. This seemingly technical change has significant implications:

• Greater access in high-demand states: More than 20 states are currently out of, or near their annual bond volume caps. Reducing the threshold to 25% opens the door for many more deals to qualify.
• More efficient use of bond cap: States will be able to stretch limited volume farther, significantly increasing  the number of qualifying projects, especially in states that have consistently run out of volume cap
• Opportunity for innovation: Recycled bond programs and blended capital stacks will become even more important as states look to meet volume needs creatively.

Still, implementation won’t be without challenges. The change applies only to bonds newly issued in 2026 or later – projects closing in late 2025 may not qualify unless they incorporate a supplemental 2026 bond issuance. These supplemental bonds must be carefully structured and are capped at the lesser of what’s needed to meet the former 50% test or 5% of aggregate basis.

There are also real implications for project financing structures:

• Increased reliance on taxable debt: With less tax-exempt bond volume required, many deals will lean more heavily on taxable debt during construction, which typically carries higher interest rates.
• Soft money pressure: More 4% deals in the market will increase demand for scarce soft funding sources to fill financing gaps.
• Investor appetite considerations: While the volume of deals may increase, the risk profile of these new structures – particularly if they involve mixed-income strategies or less experienced developers – could impact investor pricing and participation.

Additionally, human capital constraints could emerge as another limiting factor. As deal volume increases, so does the administrative burden on state agencies and third-party consultants. Without investments in staffing and processing capacity, bottlenecks may persist even as the policy opens the door for more deals.

Nonetheless, this provision represents a major step forward for the 4% LIHTC program – and one of the most effective ways to expand affordable housing production at scale.

Beyond the credits: Other legislative changes that matter

While the 9% boost and 25% bond test reduction are the headline provisions, the OBBBA includes several other legislative updates that will affect LIHTC transactions in meaningful ways:

1. Bonus depreciation reinstated

• 100% bonus depreciation is back for property placed in service after Jan. 19, 2025, subject to binding contract requirements.
• This benefits investors by front-loading tax losses, which can improve after-tax returns
• When paired with cost segregation studies, this change may enhance equity pricing, especially in CRA-motivated markets

2. Interest deductibility expanded

• Adjustments to Section 163(j) allow depreciation and amortization to be added back to adjusted taxable income (ATI)
• This change may enable greater interest deductions without needing to elect a 30-year ADS life, offering greater flexibility to developers

3. Sunset of energy efficiency incentives

• Section 45L credits (for energy-efficient residential units) and 179D expensing (for commercial buildings) are being eliminated after June 30, 2026
• The removal of 45L, which offered up to $5,000 per unit in credits, could significantly affect green affordable housing design
• Developers relying on these incentives to meet QAP-mandated green building requirements will need to find alternative funding sources – or rethink their project specs

4. Solar investment tax credit (ITC) phaseout

• Projects must begin construction by July 4, 2026, or be placed in service by Dec. 31, 2027 to qualify
• Expect a rush to meet deadlines, potentially creating supply chain delays or permitting backlogs
• As the ITC phases down, investor capital may gradually shift back toward LIHTC, helping to stabilize pricing in that space

5. What didn’t make it

• A proposed 30% basis boost for rural and tribal area developments was removed from the final bill, marking a missed opportunity to support production in some of the country’s most underfunded housing markets

Together, these changes reshape the financial profile of LIHTC transactions. Some provisions improve project economics and increase investor incentives; others create gaps that will need to be filled through policy innovation or local funding support.

Conclusion: Why these changes matter

The One Big Beautiful Bill Act isn’t just a technical tweak – it’s a federal commitment to treating affordable housing as essential infrastructure. For the LIHTC community, that means both challenges and opportunities, from navigating implementation and timing to rethinking financing and strategy.

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To understand how these changes could impact you and your organization, contact your firm advisor.

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