On June 16, 2025, the Senate Finance Committee released its tax title for the One Big, Beautiful Bill Act (OBBB), reshaping the Low-Income Housing Tax Credit (LIHTC) provisions passed by the House in ways that may significantly strengthen the long-term investment outlook. The full text can be viewed here. While the Senate proposal omits several House-passed features, such as targeted basis boosts for rural and Native communities, it introduces permanent structural reforms that could increase total housing production and improve investor certainty.
Chief among these changes is a permanent reduction in the bond financing threshold from 50% to 25% (the House proposed a temporary reduction for 2026-2029), removing a longstanding constraint on private activity bond-financed LIHTC transactions. This single change is projected to have a transformative impact on deal volume. Previous estimates suggest that a temporary 25% test could generate more than 1.1 million units over a decade. 1 Making that test permanent is expected to unlock even more unit potential and increase the number of transactions that can reach closing without complex twinning or oversubscribed bond allocations. From an investor's perspective, this change is likely to improve capital deployment efficiency, expand eligible deal flow, and stabilize future pipeline assumptions.
The Senate Finance Committee's bill also proposes a permanent 12% increase in the 9% LIHTC allocation, as compared to the House's proposed 12.5% increase limited to 2026 through 2029. While not finalized, this increase – combined with the bond test reduction – is expected to push total LIHTC-related investment beyond the $15 billion range over ten years, surpassing the House's estimated impact. Updated modeling from Novogradac and other sources is expected soon, but early projections suggest that the allocation increase alone could account for over 130,000 additional units. For investors with long-term tax equity capacity, this adjustment would raise the program's baseline and potentially improve yield availability and scale over time.
One area where the Senate version diverges from industry expectations is the complete omission of basis boost provisions. Specifically, the Senate's version leaves out the rural and Native area boosts, as well as discretionary and "difficult development area" (DDA)-type flexibilities present in the House version. While this may reduce per-project credit volumes in certain geographies, the Senate's broader goal appears to be enhancing permanency and predictability. By prioritizing permanent allocation authority and removing temporal constraints, the Senate text may provide a stronger foundation for credit pricing stability and long-range portfolio planning – particularly for institutional investors and CRA-motivated banks.
Alongside its LIHTC reforms, the Senate Finance Committee's bill also proposes a sweeping overhaul of the Opportunity Zones program. The legislation would eliminate the current sunset clause and make Opportunity Zones permanent, with new designations issued every 10 years beginning July 1, 2026. Importantly, the proposal replaces the existing tax incentive "cliff" with a graduated basis step-up: 1% annually for years 1-3, 2% annually for years 4-5, and 3% in year 6 – amounting to a 10% total reduction in deferred capital gains tax liability.
Additional provisions are aimed at encouraging more targeted and impactful investment. Notably, the bill would create "Qualified Rural Opportunity Funds" that are required to invest at least 90% of their capital in communities with populations under 50,000. These rural-focused funds would qualify for a 30% basis step-up – triple the standard OZ benefit – and would be subject to a lower substantial improvement threshold of 50%, rather than the standard 100%.
The legislation would also tighten zone eligibility criteria to improve geographic targeting. The income threshold for designating qualifying census tracts would drop from 80% to 70% of area median income, and the current exception that allows tracts adjacent to eligible areas to qualify would be eliminated. Additionally, tracts with income levels above 125% of area median income would be categorically disqualified.
Transparency and reporting obligations would also be significantly enhanced. OZ funds would be required to file annual reports disclosing investment locations, asset types, and key economic impact metrics such as job creation. These provisions aim to address long-standing concerns about program accountability and effectiveness.
The bill, however, does not include two key enhancements that had been discussed in prior legislative proposals. First, the Senate version does not extend the tax-free exit benefits to ordinary income, maintaining the rule that only capital gains are eligible for deferral and exclusion under the 10-year hold provision. Second, the bill does not align the substantial improvement test with the more flexible standard used under the LIHTC program. As a result, OZ investments must still meet the original requirement of doubling the basis of acquired property, rather than meeting a rehabilitation threshold based on a percentage of adjusted basis.
The Senate Finance Committee's proposal is far from final. It is expected to undergo parliamentarian review shortly, with a manager's amendment anticipated to incorporate final negotiated changes. Floor consideration is tentatively scheduled for the week of June 23, with a target of delivering a final bill to the President by July 4 or at least no later than the Senate's recess for August. As negotiations continue, investors should track the evolving baseline for Housing Credit volumes and prepare for the operational implications of a permanent bond test reduction. While basis boost incentives may still be revived in conference, the Senate text marks a shift toward durable reform, and investors should model both short- and long-term scenarios accordingly.
This article was written with assistance of summer associate Ben Smith.
Footnote
1. See Dirk Wallace and Peter Lawrence, Novogradac Analysis of Reintroduced AHCIA Estimates Nearly 1.6 Million Additional Affordable Housing Rental Homes Over 10 Years, Novogradac (Apr. 8, 2025), https://www.novoco.com/notes-from-novogradac/novogradac-analysis-of-reintroduced-ahcia-estimates-nearly-16-million-additional-affordable-housing-rental-homes-over-10-years.
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