The LIHTC 25% bond test
A 4% tax credit building used to need tax-exempt private activity bonds to finance at least 50% of the aggregate basis of the building and its land. For buildings placed in service in taxable years beginning after December 31, 2025, 25% can be enough, if bonds issued after 2025 finance at least 5% of that basis. The change is section 70422 of Public Law 119-21, signed July 4, 2025.
The text
Section 42(h)(4)(B) of the tax code now lets a building skip the state credit ceiling for its 4% credits if either:
- 50% or more of the aggregate basis of the building and its land is financed by volume-cap bonds, or
- 25% or more is, and one or more of those bonds are from an issue dated after December 31, 2025 that finances at least 5% of the aggregate basis.
A worked example
A 200-unit building with $70 million of aggregate basis (building plus land).
- Old test: at least $35 million of bonds.
- New test: at least $17.5 million of bonds, of which at least $3.5 million (5%) from a post-2025 issue.
The building still gets 4% credits on its eligible basis either way. What changes is how much of the state’s private activity bond volume cap the deal consumes. Deals that use the 25% test draw less volume cap each, so a state that is short of cap can fund more of them.
What it doesn’t change
The 25% is a floor on bond financing, not a cap.
The other half of section 70422
The same section made permanent the 12% increase in each state’s 9% credit allocation for calendar years after 2025. The earlier 12.5% increase ran from 2018 through 2021 and had expired.
Source
Public Law 119-21, section 70422 (139 Stat. 234-235), amending 26 U.S.C. 42(h)(3)(I) and 42(h)(4)(B). Enacted text on govinfo.