Three existing federal tax incentive programs that have been used frequently by developers received significant upgrades in this summer’s One Big Beautiful Bill Act. Low-income housing tax credits (LIHTCs) have long provided gap equity for affordable housing projects all over the country. New markets tax credits have been providing gap funding for a wide variety of economic development projects for more than 25 years. More recently, Opportunity Zones have steered investments in projects in low-income communities. The Big Beautiful Bill made improvements to each of these programs.
Low-income housing tax credits
Of these three incentives, LIHTCs have been around the longest. Under the federal tax code, taxpayers are entitled to claim LIHTCs annually over a 10-year period for the costs of construction of new affordable housing projects or the substantial rehabilitation of existing affordable housing projects. Rather than using the LIHTCs themselves, developers typically sell the right to receive the LIHTCs during the 10-year period to investors in exchange for an upfront equity investment in the affordable housing project. This equity investment can often make the difference in a project’s financial viability.
The law limits the annual amount of LIHTCs available for projects. States receive allocation amounts of so-called 9 percent LIHTCs based on their population and allocate the 9 percent LIHTCs to projects through a competitive application process administered by state housing finance agencies. So-called 4 percent LIHTCs are generated with respect to an affordable housing project of which at least 50 percent is financed with tax-exempt multifamily housing bonds. As with allocation for 9 percent LIHTCs, allocation for tax-exempt multifamily housing bonds is also limited annually, apportioned to states in amounts based on population, and allocated for projects through a competitive application process administered by state housing finance agencies.
The Big Beautiful Bill revises the LIHTC program in two important ways. First, it increases the allocated amount of 9 percent LIHTCs by 12 percent, beginning in 2026. Second, it reduces from 50 percent to 25 percent the amount of a project that must be financed with tax-exempt multifamily housing bonds to generate 4 percent LIHTCs. Beginning in 2026, both changes to the program should result in more affordable housing projects, though it may take a little longer to see how the change to the 4 percent LIHTCs shakes out as the lower borrowing cost associated with tax-exempt bonds also serves as an important subsidy for these projects.
New markets tax credits
For almost 25 years, new markets tax credits have proved to be a valuable tool in promoting economic development throughout the United States. Designed to stimulate private investment in economically distressed and low-income communities, these tax credits generally provide a net subsidy of 15–20 percent for projects in certain designated census tracts. The New Markets Tax Credits program has provided gap financing for various worthy development projects, including hospitals and other medical facilities, educational institutions, retail and commercial facilities, manufacturing facilities, and mixed-use projects.
The program provides a 39 percent federal tax credit over seven years to investors who fund projects in qualifying census tracts. As with LIHTCs, that amount of new markets tax credits is limited. Unlike LIHTCs, however, new markets tax credits allocation is not allocated to states; instead, the application process is administered by the Community Development Financial Institutions Fund, a program under the U.S. Treasury Department. Community development entities—which are entities that have a mission of serving low-income communities and are established by such entities as financial institutions, nonprofits, and developers—apply to the Community Development Financial Institutions Fund for allocation of new markets tax credits and then award such an allocation to projects and businesses that generate meaningful community impact. As with LIHTCs, the right to receive the new markets tax credits over the seven-year period is sold to investors in exchange for an upfront equity investment in a project.
Until recently, developers, community development entities, and tax credit investors had to rely on Congress to provide new NMTC allocation authority nearly every year, so uncertainty affected the program. However, at least for the near term, that will no longer be the case, as the Big Beautiful Bill provides for ongoing and annual new markets tax credits allocation of $5 billion beginning in 2026. This permanent extension follows a double allocation round of $10 billion to be awarded to community development entities almost any day now.
Opportunity Zones
Opportunity Zones are the newest of these subsidies. They were created in 2017 with the passage of the Tax Cuts and Jobs Act. Developers, however, have already put Opportunity Zones to use in the short time they have been around (find more information in a September 2025 article on Opportunity Zones published by Urban Land magazine). Like LIHTCs and new markets tax credits, Opportunity Zones are intended to drive investment to low-income communities and to projects that serve low-income families, but many of the similarities end there, as Opportunity Zones operate differently from tax credits.
As initially enacted, Opportunity Zones offered two significant incentives to investors in connection with investments in low-income communities. First, financial backers who invested the proceeds of recently realized capital gains in qualified opportunity funds that invest in projects in Opportunity Zones could defer the taxes owed on such capital gains until the date the investment is sold or December 31, 2026, whichever was earlier. Additionally, under the original statute, these investors could receive a permanent reduction of 10 percent of the amount of such capital gains if the Opportunity Zone investment is held for five years, or 15 percent if held for seven years. Obviously, the value of this deferral subsidy decreased significantly the longer after 2017 investors were able to make such investments.
Second, investors who hold the investment for at least 10 years can elect to receive a step-up in tax basis to the fair market value of the investment at the time of the sale of the investment, effectively resulting in a permanent exclusion of future gains resulting from the investment in the Opportunity Zone.
The Big Beautiful Bill extended the Opportunity Zone program by deleting the December 31, 2026 sunset date for deferral of capital gains tax, but only for Opportunity Zone investments that will be made after December 31, 2026. For such investments made after December 31, 2026, however, capital gains tax can be deferred for five years or the date the investment is sold, whichever is earlier, and such investors can still receive a permanent reduction of 10 percent of the amount of such capital gains if the Opportunity Zone investment is held for five years. The Big Beautiful Bill did not alter the ability of investors holding an Opportunity Zone investment for at least 10 years to elect to receive a step-up in tax basis to the fair market value of the investment at the time of the sale of the investment.
All three of these federal tax incentives have aided in the development of countless economic development projects. Thanks to the Big Beautiful Bill, these federal tax incentives will continue to aid in the development of many more.
