By Marc Shaw
The most consequential rewrite of the Low-Income Housing Tax Credit in decades took effect on January 1, 2026, and the headline number is simple: the tax-exempt bond financing test for 4% credits dropped from 50% of aggregate basis to 25%. The 2026 LIHTC changes came through the One Big Beautiful Bill Act, signed July 4, 2025, and they are permanent rather than a temporary stimulus measure. For developers, lenders, syndicators and the title and closing teams supporting them, nearly every assumption baked into a 4% deal model needs to be revisited.
The One Big Beautiful Bill Act affordable housing provisions made two structural changes to Section 42 rather than tinkering at the margins.
Both are permanent, and both took effect for the 2026 calendar year:
The changes apply to buildings placed in service after December 31, 2025, and to state allocation authority beginning in the calendar year 2026. The One Big Beautiful Bill Act was signed on July 4, 2025, giving agencies roughly six months to revise Qualified Allocation Plans before the rules went live.
Under prior law, a 4% deal only qualified for credits on 100% of eligible basis if tax-exempt private activity bonds financed at least 50% of aggregate basis, meaning the building plus the land. That single test was the binding constraint in most states, because private activity bond volume cap ran out long before deals did. The private activity bond 25 percent rule cuts that requirement in half.
There is one condition worth flagging, because it trips people up on transition-year deals. To use the lower threshold, at least 5% of aggregate basis must be financed with tax-exempt bonds issued on or after January 1, 2026. A project carrying only 2025-vintage bond issuance does not automatically qualify.
The practical arithmetic is straightforward. A $60 million project that previously needed roughly $30 million in bond allocation can now potentially qualify with roughly $15 million, freeing the balance of a state’s cap for the next deal in line. That is why the change is often described as doubling the productive capacity of existing volume cap. The caveat is that multifamily housing bonds compete with single-family mortgage revenue bonds and other exempt facility uses for the same state ceiling, so the practical gain depends on state allocation choices. For 2026 the PAB ceiling is the greater of $135 per capita or $397,625,000.
Here is the part that gets lost in the headlines: 25% is a federal floor, but it is rarely the number that governs a deal. Most state agencies responded by capping how much bond volume a project may request, not by raising the minimum a project must hit. That distinction matters, because it inverts the modeling.
Published policies cluster around 27.5% to 30% of aggregate basis as a standard request, with discretion to go higher where a project supports additional permanent debt. North Carolina’s 2026 draft QAP uses 30% of aggregate basis or maximum supportable debt. Iowa proposed the lesser of 35% of aggregate basis or $25 million per project. Minnesota set 25% to 30% as the standard for bond applications under its 2026-2027 QAP. Washington allows 30%, with up to 40% where a developer cannot obtain recycled cap.
The reasoning is a mix of risk management and demand rationing. Agencies want a cushion above 25% in case cost overruns or basis adjustments drop a deal below the federal floor at cost certification, and they want to avoid exhausting volume cap in a single cycle. The practical sequence: size to the state’s cap and the project’s supportable debt, then confirm the deal still clears 25% of aggregate basis under stressed cost assumptions.
State policies are still being published and amended. NCSHA maintains a running tracker of state 25% test policies, which is the fastest way to confirm where a jurisdiction currently stands.
Because thresholds now vary by jurisdiction, LIHTC state allocation authority 2026 planning has become genuinely state-specific. A Pennsylvania deal, a New York deal and a Texas deal may each carry a different bond sizing assumption for otherwise identical projects.
The competitive side of the program got its own boost. The 12% increase, stacked on the annual inflation adjustment, raises the 2026 per capita multiplier from $3.00 to $3.416 and the small-state minimum from $3,455,000 to $3,953,600. Both figures come from Revenue Procedure 2025-32, which the IRS revised on October 17, 2025 after its original October 9 release omitted the OBBBA increase. Nationally, the 9% pool rose to roughly $1.20 billion for 2026, an increase of about 14.4% over 2025.
That expansion matters most for deep-affordability and rural projects that cannot pencil on 4% credits alone. A 12% larger competitive pool does not eliminate oversubscription, since most states still see applications running two to four times available credit, but it moves a meaningful number of borderline projects from the waiting list into the funded column.
The affordable housing capital stack changes are where the new rules become an underwriting exercise rather than a policy conversation. Under the old regime, the 50% test frequently forced developers to carry more tax-exempt debt than the property’s cash flow actually supported, then paper over the gap with soft sources or aggressive assumptions.
With the floor at 25%, hard debt sizing returns to fundamentals:
Investor economics improved on a parallel track. The restoration of 100% bonus depreciation for qualifying property placed in service after early 2025 improves after-tax yield, which has already put upward pressure on equity pricing in several markets.
Smaller bond tranches and more layers of subordinate debt mean more documents, more lien positions and more intercreditor coordination at closing, not less. In our experience on multi-source affordable deals, the failure points tend to be procedural rather than legal.
No. The 15-year compliance period and 30-year extended use agreement under Section 42 are unchanged, and the restrictive covenant still records against title. Only the bond financing test and allocation authority were modified.
Replacing a large bond tranche with three or four smaller sources typically adds two to five recorded instruments per closing. Each additional lender brings its own endorsement requirements, subordination terms and recording sequence, which is where deals most often lose a week or more.
Because both provisions are permanent, the effect compounds. Industry projections widely cited during the 2025 legislative debate estimated well over one million additional affordable units financed across the following decade, with the bond threshold change accounting for the large majority of that volume. Whether the market realizes that number depends on construction costs, interest rates and how quickly state agencies loosen their QAP thresholds toward the federal floor.
The federal floor is 25% of aggregate basis, but most state agencies cap bond requests at a higher figure, commonly 27.5% to 30%, with discretion for additional supportable debt. Model to your state’s published policy, confirm the deal still clears 25% at cost certification, and verify that at least 5% of aggregate basis comes from bonds issued on or after January 1, 2026.
States received a permanent 12% increase. For 2026, each state’s 9% credit ceiling is the greater of $3.416 multiplied by state population or $3,953,600, per Revenue Procedure 2025-32. Both figures continue to be adjusted annually for inflation.
World Wide Land Transfer handles title insurance, search and settlement for multi-source affordable housing transactions, including bond-financed 4% deals with layered soft debt. Contact our commercial team with your capital stack and target closing date, and we will map the title requirements and endorsement package before your lenders start circulating documents.
