OBBB increases the low-income housing tax credit by 12%

Permanent allocation enhancement transforms affordable housing investment landscape

The One Big Beautiful Bill Act provides a groundbreaking enhancement to the low-income housing tax credits by implementing a permanent 12% increase in annual state allocations, effective as of 2026. This historic legislation provides unprecedented opportunities for real estate investors while addressing America's affordable housing shortage through expanded development funding.

Under current law, states receive approximately $2.75 per capita in annual LIHTC allocations, generating roughly $10 billion in yearly credits nationwide. The One Big Beautiful Bill Act permanently increases these allocations by 12%, creating an additional $1.2 billion in annual credit authority that flows directly to affordable housing developers and their investors.

These enhanced allocations represent one of the most significant expansions of affordable housing incentives in recent history. The permanent nature of this enhancement provides long-term certainty for developers and investors, enabling more ambitious projects and larger-scale affordable housing developments across all markets.

The timing of these changes positions real estate investors to capture substantial tax benefits while contributing to community development goals. With proper structuring and strategic coordination with other tax benefits, eligible Individuals can reduce their annual tax liability by hundreds of thousands of dollars while building valuable real estate portfolios.

Understanding the enhanced LIHTC allocation structure

The One Big Beautiful Bill Act fundamentally transforms low-income housing tax credit allocations by permanently enhancing the program for credits allocated in 2026 and beyond. These changes provide immediate benefits to developers and investors participating in affordable housing development.

Key features of the enhanced allocation structure include:

• State allocations increase by 12% permanently starting with 2026 credits
• Per capita allocation rises from approximately $2.75 to $3.08 per state resident
• Additional allocation authority creates $1.2 billion in new annual credits nationwide
• Permanent structure provides long-term certainty for development planning
• Annual inflation adjustments continue to apply to enhanced base amounts

The enhanced allocations are applied automatically to all states and qualifying territories, with each jurisdiction receiving proportional increases based on its population. Larger states, such as California, Texas, Florida, and New York, benefit the most from the significant absolute increases, while all jurisdictions gain enhanced development capacity.

This permanent enhancement eliminates uncertainty around future allocation levels, enabling developers to plan multi-year projects with confidence in available credit authority. The predictable funding structure supports larger developments and more ambitious affordable housing initiatives across all markets.

Calculating your potential annual tax credit benefits

Your potential tax benefits under the enhanced LIHTC program depend on your investment amount, credit percentage, and overall tax situation. The One Big Beautiful Bill Act's allocation increases enable larger projects and more investment opportunities across all markets.

Example calculation for 9% competitive allocation:

1. Project eligible basis: $15 million
2. Annual credit percentage: 9%
3. Annual credits generated: $1,350,000
4. Credit period: 10 years
5. Total credits over life: $13,500,000

Example calculation for 4% bond-financed project:

1. Project eligible basis: $25 million
2. Annual credit percentage: 4%
3. Annual credits generated: $1,000,000
4. Credit period: 10 years
5. Total credits over life: $10,000,000

For investors in the top 37% tax bracket, a $1 million investment in LIHTC projects generating $135,000 in annual credits provides benefits equivalent to $135,000 in tax savings each year for 10 consecutive years. These calculations demonstrate the substantial value creation available through strategic LIHTC investments.

Strategic timing considerations:

• Credits are allocated competitively through state agencies during annual allocation rounds
• Projects placed in service in 2026 or later benefit from enhanced allocation pools
• Multi-year development projects can capture credits across multiple allocation years
• Coordination with state-specific priorities maximizes allocation competitiveness

Simplified bond financing qualification expands opportunities

The One Big Beautiful Bill Act permanently simplifies bond financing qualification requirements, creating additional development opportunities beyond those available through competitive allocations. These changes significantly expand the pool of projects eligible for 4% credits, eliminating the need to compete for limited state allocation authority.

Enhanced bond financing provisions:

• Permanent 50% bond financing threshold for all projects
• Alternative 25% threshold permanently available for projects placed in service after December 31, 2025
• Streamlined qualification process reduces development timeline uncertainty
• Combined with 12% allocation increase, creates unprecedented credit availability

The dual threshold structure provides developers with flexibility in structuring their financing while maintaining credit eligibility. Projects meeting either the 50% standard threshold or the lower 25% alternative threshold qualify for 4% credits outside the competitive allocation process.

Bond financing coordination benefits:

• Tax-exempt bond financing provides below-market interest rates
• 4% credits available without competing for the limited 9% allocations
• Larger projects become financially feasible with combined bond and credit benefits
• Permanent qualification rules enable long-term development planning

Strategic developers can leverage the simplified bond rules to pursue larger projects that generate substantial credit benefits while avoiding the competitive allocation process. This approach provides certainty around credit availability while capturing below-market financing rates.

Qualifying property and development requirements

The One Big Beautiful Bill Act maintains existing property qualification standards while expanding available credit authority through enhanced allocations. Understanding these requirements ensures developers and investors maximize available benefits while maintaining compliance.

Primary qualification requirements include:

• At least 20% of units are reserved for households at 50% or below the area median income
• Alternative 40% minimum for households at 60% or below the area median income
• 30-year extended use agreement restricting rents and occupancy
• Annual compliance certification through state housing agencies
• Substantial rehabilitation standards for existing property improvements

The legislation preserves the fundamental structure of the LIHTC program requirements while dramatically expanding available credit authority. Projects meeting these standards become eligible for enhanced credit amounts under the increased allocation pools.

Project type opportunities:

• New construction developments in high-growth markets
• Substantial rehabilitation of existing affordable properties
• Adaptive reuse of commercial properties for residential purposes
• Mixed-income developments combining affordable and market-rate units
• Rural development projects in underserved communities

The enhanced allocations particularly benefit larger-scale developments that may have struggled to compete for limited credits under prior allocation levels. Projects serving extremely low-income populations and developments in difficult development areas receive additional credit benefits under existing scoring systems.

Strategic coordination with depreciation maximizes returns

The enhanced LIHTC allocations create powerful opportunities for coordination with accelerated Depreciation and amortization strategies under the One Big Beautiful Bill Act. This comprehensive approach ensures investors capture every available tax benefit while building long-term wealth through real estate ownership.

Depreciation coordination strategies:

• Cost segregation studies identify components eligible for accelerated depreciation
• Short-life assets like appliances and finishes qualify for bonus depreciation
• Credits and depreciation work together to maximize first-year tax benefits
• Long-term depreciation provides ongoing tax benefits beyond the 10-year credit period

Combined benefit calculation example:

1. LIHTC annual credits: $1,350,000
2. Accelerated depreciation deductions: $2,000,000
3. Total first-year tax benefits: $3,350,000
4. Tax savings at 37% rate: $1,239,500 (credits provide dollar-for-dollar savings)

This coordination strategy enables investors to capture immediate tax benefits while simultaneously generating substantial depreciation deductions that reduce their taxable income. The combined approach creates unprecedented opportunities for tax-efficient wealth building through affordable housing investment.

Passive activity and at-risk rule coordination

LIHTC investments are subject to specific tax rules regarding passive activity limitations and at-risk basis requirements, which investors must carefully navigate. The One Big Beautiful Bill Act's enhanced allocations make understanding these rules even more critical for maximizing available benefits.

Passive activity credit limitations:

• Credits offset tax liability from passive activities without limitation
• Excess credits carry forward indefinitely to future tax years
• Portfolio income from other investments cannot generally utilize passive credits
• Grouping elections and material participation standards affect credit utilization

At-risk basis requirements:

• Investors must maintain a sufficient at-risk basis to claim credits
• Non-recourse financing from qualified lenders counts toward an at-risk basis
• Personal guarantees can increase at-risk basis amounts
• Annual basis tracking ensures ongoing credit eligibility

Strategic investors structure their LIHTC investments to maximize credit utilization while maintaining compliance with these complex rules. Working with experienced tax advisors becomes essential for navigating the interaction between enhanced credits and existing tax limitations.

Entity structure optimization for LIHTC investments

Different investment structures can leverage the enhanced LIHTC allocations differently under the One Big Beautiful Bill Act. Understanding how credits flow through different ownership structures helps investors optimize their tax planning.

Partnership structure benefits:

• Credits pass through to partners based on allocation agreements
• Special allocations can direct credits to partners with the most significant tax liability
• Partnership agreements provide flexibility in profit and credit sharing
• Multi-tiered structures accommodate various investor types

S Corporations considerations:

• Credits flow through to shareholders proportionate to ownership
• S Corporations provide pass-through benefits with corporate liability protection
• Basis limitations may restrict credit utilization in certain circumstances
• Built-in gains considerations affect conversion strategies

Individual investor strategies:

• Direct ownership through limited partnerships provides credit access
• Individuals can combine LIHTC with other real estate strategies
• Passive activity limitations require careful planning for credit utilization
• Estate planning considerations affect long-term ownership structures

Multi-year development planning maximizes allocation benefits

The permanent nature of the One Big Beautiful Bill Act's 12% allocation increase enables sophisticated multi-year development strategies that capture enhanced credits across multiple projects and allocation cycles. Understanding these opportunities allows developers and investors to build substantial, affordable housing portfolios.

Strategic development sequencing:

• Phase large projects across multiple years to capture credits in different allocation rounds
• Build a track record with smaller projects before pursuing larger developments
• Coordinate project timing with market cycles and financing availability
• Maintain a consistent development pipeline to optimize operational efficiency

Portfolio growth strategies:

• Use enhanced allocations to expand into new geographic markets
• Develop relationships with multiple state agencies to access broader allocation pools
• Combine competitive 9% credits with bond-financed 4% credits across the portfolio
• Build specialized expertise in property types or target populations

Example multi-year strategy:

1. Year 1: Develop a 100-unit project capturing $1.8 million in annual credits
2. Year 2: Develop a 150-unit project capturing $2.7 million in annual credits
3. Year 3: Develop two 75-unit projects capturing $2.7 million combined credits
4. Total portfolio: 400 units generating $7.2 million in annual credits

This sequenced approach allows developers to scale operations while maintaining quality standards and building institutional relationships that support future allocation competitiveness.

State allocation priorities and competitive strategies

The enhanced LIHTC allocations under the One Big Beautiful Bill Act are distributed through state housing finance agencies, which maintain independent allocation priorities and scoring systems. Understanding these state-specific requirements becomes essential for maximizing allocation success.

Common state priority areas:

• Projects serving extremely low-income populations below 30% area median income
• Developments in qualified census tracts and difficult development areas
• Projects incorporating sustainable building practices and energy efficiency
• Developments providing supportive services for special needs populations
• Properties preserving existing affordable housing stock

Competitive advantage strategies:

• Partner with experienced developers who demonstrate strong track records
• Incorporate multiple state priority elements into single projects
• Provide evidence of community support and local government backing
• Demonstrate financial feasibility with conservative underwriting
• Commit to extended affordability periods beyond minimum requirements

Geographic opportunity assessment:

• High-cost markets provide larger eligible basis amounts and credit allocations
• Rural areas benefit from set-asides and less competitive allocation environments
• Qualified opportunity zones offer additional tax benefits through coordination
• Augusta rule strategies can generate additional income from project facilities

Investment risk management and due diligence

The substantial tax benefits available through enhanced LIHTC allocations require commensurate attention to investment risks and thorough due diligence. The One Big Beautiful Bill Act's permanent allocation increases make understanding these considerations even more critical.

Primary investment risks include:

• Recapture liability if projects fail to maintain compliance during the 15-year compliance period
• Market risks affecting property operations and rental income generation
• Concentration risk from heavy allocation to a single asset class
• Regulatory changes at the state or local levels affecting operations
• Partnership disputes over management or distribution issues

Essential due diligence elements:

• Developer track record assessment through completed project review
• Market analysis confirming sustainable demand for affordable housing
• Financial feasibility review with conservative occupancy and expense assumptions
• Legal structure evaluation, ensuring proper credit allocation mechanisms
• Ongoing compliance monitoring systems protecting against recapture risk

Risk mitigation strategies:

• Diversify across multiple projects and geographic markets
• Partner with experienced operators demonstrating strong compliance records
• Maintain adequate reserves for property operations and capital improvements
• Structure guaranteed payments or preferred returns, protecting downside risk
• Coordinate with insurance strategies protecting against casualty losses

Coordination with retirement and wealth-building strategies

The substantial tax savings from enhanced LIHTC investments create opportunities for increased retirement contributions and comprehensive wealth-building strategies under the One Big Beautiful Bill Act. Investors can redirect tax savings into additional growth opportunities.

Retirement plan coordination:

• Use credit tax savings to maximize Traditional 401k contributions up to $23,000 in 2025
• Fund Roth 401k accounts with tax savings for tax-free growth
• Coordinate with defined benefit plans for business owners and partners
• Build retirement security through combined real estate and retirement accounts

Additional investment strategies:

• Reinvest tax savings into additional LIHTC projects, expanding portfolio
• Fund Health savings account contributions for triple-tax-advantaged medical savings
• Deploy savings toward Tax loss harvesting strategies in taxable investment accounts
• Coordinate with other real estate investments, maximizing total portfolio returns

Wealth transfer planning:

• LIHTC partnerships can be structured to facilitate generational wealth transfer
• Credits provide ongoing tax benefits supporting retirement income needs
• Property appreciation builds long-term equity beyond credit benefits
• Estate planning strategies can maximize value transfer to beneficiaries

Documentation and compliance requirements

The enhanced LIHTC allocations under the One Big Beautiful Bill Act require meticulous documentation to ensure full compliance with IRS requirements while maximizing available credits. Proper record-keeping becomes even more critical with the larger credit amounts available.

Essential documentation requirements:

• Initial certification of tenant income and household composition
• Annual recertification documentation for all qualifying tenants
• Rent restriction records demonstrating compliance with maximum allowable rents
• Annual owner certifications submitted to state housing agencies
• Third-party property management records supporting compliance claims

IRS Form 8609 requirements:

• State agencies issue Form 8609 for each building after the placed-in-service date
• Form documents the maximum credit amount available to each building
• Annual Form 8586 filing claims credits on investor tax returns
• Coordination with state agency reporting maintains ongoing compliance

Recapture prevention strategies:

• Implement systematic compliance monitoring throughout the 15-year compliance period
• Maintain detailed tenant files documenting eligibility and rent compliance
• Conduct regular internal audits, identifying potential compliance issues
• Respond promptly to state agency findings during periodic inspections
• Structure partnership agreements clarifying compliance responsibilities

Transform your investment portfolio starting in 2026

Don't miss the unprecedented opportunities available through the One Big Beautiful Bill Act's permanent 12% enhancement to low-income housing tax credit allocations. Starting with credits allocated in 2026, eligible investors can claim substantially larger tax credits while contributing to affordable housing and building valuable real estate portfolios.

Instead's comprehensive tax platform makes it simple to evaluate LIHTC investment opportunities, track your credit claims, and ensure full compliance with program requirements. Our intelligent system automatically identifies coordination opportunities with other valuable tax strategies under the new legislation.

Get started with Instead today to maximize your LIHTC benefits while building a comprehensive tax strategy that supports your investment goals and long-term financial success.

Frequently asked questions

Q: How much can investors save annually with enhanced LIHTC allocations?

A: Annual savings depend on your investment amount and credit allocation. Investors in competitive 9% projects can receive annual credits equal to 9% of the eligible basis for ten consecutive years, resulting in a dollar-for-dollar reduction of tax liability. A $10 million eligible basis generates $900,000 in annual credits, resulting in $900,000 in tax savings each year for a decade.

Q: Do the enhanced allocations apply to projects already under development?

A: The 12% allocation increase applies to credits allocated in 2026 and later years. Projects that have already been allocated credits under prior-year allocation rounds receive credits based on those earlier allocation levels. However, projects that complete development and receive final allocations in 2026 or later benefit from the enhanced pools.

Q: Can I invest in LIHTC projects if I don't have passive income?

A: Yes, LIHTC investments remain valuable even without passive income from other sources. Credits that cannot be utilized in the current year carry forward indefinitely to future tax years when you have sufficient tax liability. Many investors accumulate credits during high-income working years and use them throughout retirement as they generate taxable income.

Q: How do the simplified bond financing rules work with competitive allocations?

A: Bond-financed projects receive 4% credits outside the competitive allocation process, provided they meet either the 50% standard financing threshold or the 25% alternative threshold. Projects using bond financing don't compete for the limited 9% credits, making them attractive for developers who want allocation certainty and lower interest rates.

Q: What happens if my LIHTC project fails compliance during the 15 years?

A: Compliance failures trigger credit recapture equal to previously claimed credits plus interest. The recapture amount depends on the severity and timing of the noncompliance event. Proper compliance monitoring, prompt correction of identified issues, and adequate reserve funding minimize recapture risk.

Q: Can I combine LIHTC with opportunity zone benefits?

A: Yes, qualified opportunity zone census tracts can overlap with LIHTC-eligible areas. Projects developed in these overlapping areas may qualify for both LIHTC benefits and opportunity zone capital gains deferral, though careful structuring is required to maximize both benefit streams. Consult with experienced tax advisors to optimize the coordination.

Q: How long does the LIHTC allocation process typically take?

A: Competitive allocation timelines vary by state, but generally involve annual application rounds with allocation decisions announced within six months. Projects then have approximately two years to complete construction and receive final credit allocations. Bond-financed projects often move faster since they don't require competitive allocation approval.