The 25% bond test for 4% LIHTC deals, from Public Law 119-21

A 4% deal gets its credits without touching the state’s credit ceiling only if tax-exempt private activity bonds finance enough of the building and its land. Until 2026 that meant 50% or more of aggregate basis. Section 70422(b) of Public Law 119-21, signed July 4, 2025, added a second way in: 25% or more, if one or more of the bonds are part of an issue dated after December 31, 2025 and those bonds finance at least 5% of the aggregate basis of the building and land.

Which buildings

The new test applies to buildings placed in service in taxable years beginning after December 31, 2025. When rehab is treated as a separate new building under 42(e), section 70422(b)(2)(B) sets a special rule for when the existing building and the rehab count as placed in service. The 50% test still works for everyone; the 25% test is an alternative. Both are measured against the aggregate basis of the building and the land it sits on, which is broader than eligible basis because it includes land.

The arithmetic

A building with $28,000,000 of depreciable basis on $2,000,000 of land has $30,000,000 of aggregate basis. Under the 50% test it needs $15,000,000 of tax-exempt bonds. Under the 25% test it needs $7,500,000, at least $1,500,000 of it (5%) from a 2026-or-later issue. The credit estimator shows both numbers for your deal.

Why it matters

Bond cap is the binding constraint for 4% deals in many states. For 2026 each state’s private activity bond cap is the greater of $135 per resident or $397,625,000 (Rev. Proc. 2025-32). Halving the bonds each deal needs means the same cap can cover up to twice as many deals, if issuers allocate on the new test.

The credits themselves don’t change. The building still takes the 4% floor rate on its qualified basis, with the 130% boost in a QCT or DDA. What changes is how much of the capital stack must be tax-exempt debt; the rest can be taxable debt, which may be simpler to structure.

Read the law

Public Law 119-21, sec. 70422(b), amending IRC 42(h)(4)(B). Check with bond counsel how your state’s issuer is allocating cap under the new test before you size the bonds.