Enhancements to Federal Tax Incentive Programs in the One Big Beautiful Bill Act

This summer, developers received exciting news with significant upgrades to three federal tax incentive programs in the recently passed One Big Beautiful Bill Act. These incentives have become vital tools in addressing economic development and affordable housing across the United States. The three key programs affected are the Low-Income Housing Tax Credits (LIHTCs), New Markets Tax Credits (NMTCs), and Opportunity Zones.

Low-Income Housing Tax Credits (LIHTCs)

LIHTCs have been around since the 1980s and have consistently provided essential gap equity funding for affordable housing projects. This federal tax credit allows taxpayers to claim tax credits annually over a 10-year span for costs related to constructing new affordable housing or carrying out substantial renovations on existing projects.

Typically, developers don’t claim the LIHTCs directly; instead, they sell the rights to these credits to investors. In return, developers receive upfront equity investment, which can often mean the difference between a project’s success and failure.

Allocation Process

There are annual limits on the LIHTCs available for projects. The share of 9 percent LIHTCs is allocated to states based on their population, distributed through a competitive application process managed by state housing finance agencies. For the 4 percent LIHTCs, which are derived from projects financed with tax-exempt multifamily housing bonds, the law requires that at least 50 percent of the project must be funded through these bonds.

Changes Under the Big Beautiful Bill

The One Big Beautiful Bill Act introduces two significant upgrades to LIHTCs. First, starting in 2026, the allocated amount of 9 percent LIHTCs will increase by 12 percent, providing much-needed additional funding for affordable housing projects. Secondly, the threshold for generating 4 percent LIHTCs has been lowered from 50 percent to 25 percent financing through tax-exempt bonds. This should encourage more projects to seek LIHTC benefits, although the exact impact may take some time to materialize.

New Markets Tax Credits (NMTCs)

The NMTC program has functioned for nearly 25 years, effectively promoting economic development in economically distressed areas. Initially designed to inspire private investment in low-income communities, these credits provide a net subsidy of 15-20 percent for various projects situated in designated census tracts.

Program Overview

Investors receive a 39 percent federal tax credit spread over a seven-year period for putting funds into projects in qualifying census tracts. Unlike LIHTCs, allocations for NMTCs are not decided at the state level; instead, they are managed by the Community Development Financial Institutions Fund, under the U.S. Treasury Department. Community development entities—entities with missions focused on serving low-income communities—apply to receive allocations and then distribute them to impactful local projects.

Recent Developments

One of the previous challenges for developers and investors was the uncertainty surrounding annual NMTC allocation authority, which relied on Congressional action. With the One Big Beautiful Bill Act, this uncertainty has been mitigated. The Act ensures an ongoing annual allocation of NMTCs set at $5 billion starting in 2026. Additionally, a double allocation round of $10 billion is expected to be awarded imminently, providing immediate relief and opportunity for community development initiatives.

Opportunity Zones

Opportunity Zones are the newest of these federal incentives, established under the Tax Cuts and Jobs Act of 2017. These zones are designed to drive investments into low-income communities, with a slightly different operational approach compared to the previously mentioned tax credits.

Incentives for Investors

Initially, Opportunity Zones offered two primary incentives: First, investors who used the proceeds from recently realized capital gains to invest in qualified opportunity funds could defer the associated taxes until the investment is sold or until December 31, 2026, whichever came first. Secondly, investors could reduce their capital gains tax by 10 percent after holding the investment for five years or by 15 percent after seven years.

Additionally, investments held for a minimum of 10 years could qualify for a significant tax benefit known as a step-up in tax basis at the investment’s fair market value at the time of sale, effectively allowing for permanent exclusion of future gains.

Modifications Under the One Big Beautiful Bill Act

The One Big Beautiful Bill Act made notable adjustments to the Opportunity Zones program. It eliminated the existing December 31, 2026, deadline for deferring capital gains taxes but applied this change only to investments made after that date. Investors can still benefit from deferring taxes for five years or until the sale, along with the potential reductions for prolonged investments. The provisions regarding the 10-year holding period for step-up in basis remain intact.

Conclusion

The revitalized programs for LIHTCs, NMTCs, and Opportunity Zones represent a robust commitment to fortifying economic development and affordable housing. Enhancements made through the One Big Beautiful Bill Act promise not only to benefit developers and investors but, more importantly, to enhance the communities they serve across the nation.