Neighborhood Homes Investment Act
Neighborhood Homes Investment Act creates a new federal income tax credit called the Neighborhood Homes Credit (Sec. 42A) to promote the development and rehabilitation of affordable owner-occupied homes in distressed communities. The credit is tied to the cost of building or rehabilitating a qualified residence and to the sale price to a qualified homeowner at an affordable level. It is intended to close financing gaps that prevent new construction or rehab in low-income areas and to support neighborhood revitalization and greater owner-occupancy. States would administer the program through designated State “neighborhood homes credit agencies,” allocate credits to qualified projects, and set priorities to minimize barriers for small builders and ensure compliance with housing and fair housing goals. The bill also makes related changes to tax rules and provides for repayment and enforcement mechanisms if an affordable sale or rehabilitation arrangement is not maintained. The amendments would take effect for tax years beginning after December 31, 2025. In practice, eligible projects would be subsidized through a tax credit that can be claimed when a qualified residence is sold to a qualifying homeowner at an affordable price, with separate provisions for owner-occupied rehabilitation and for certain energy subsidies. The bill envisions ongoing reporting, state-level administration, and potential penalties or recapture if the affordable-sale conditions lapse within five years.
Key Points
- 1Creation and scope of the Neighborhood Homes Credit
- 2- A new Sec. 42A credit (the Neighborhood Homes Credit) is added to the tax code. It is claimed under the general business credit framework and is available for the sale of qualified residences in affordable sales to qualified homeowners.
- 3- The credit for each qualified residence is the lesser of: (a) the excess of reasonable development costs over the sale price (with an option to go up to 120% of that excess if needed to ensure feasibility), (b) 40% of eligible development costs, or (c) 32% of the national median sale price for new homes (as of the most recent census data when an allocation is made).
- 4Qualified residence, costs, and census tract rules
- 5- A qualified residence is a de facto owner-occupied dwelling (house, condo, or cooperative unit, up to 4 residential units) that is part of a qualified project and located in a qualified census tract.
- 6- “Reasonable development costs” include acquisition of land/buildings, construction, substantial rehabilitation, demolition, and environmental remediation, subject to standards set by the administering agency.
- 7- “Substantial rehabilitation” has specific thresholds (exceeding $25,000 or 20% of land/building acquisition costs, whichever is greater).
- 8- Qualified census tracts meet specific income/poverty/house value criteria, or are designated by the credit agency for project needs (including disaster areas or areas with a shortage of affordable owner-occupied homes).
- 9Affordable sale to qualified homeowners
- 10- An affordable sale is a transfer to a qualified homeowner at a price tied to area income levels. The sale price can be up to:
- 11- 4 x area median family income for most homes, or
- 12- 5 units: 125% (2 units), 150% (3 units), 175% (4 units) of the base amount for affordable housing in the tract.
- 13- A qualified homeowner must have family income at or below 140% of the area median income at the time of binding contract for the sale.
- 14Allocation, ceilings, and state administration
- 15- State neighborhood homes credit agencies allocate credits to qualified projects. There are annual state ceilings, carryforwards, and rules to protect the limit.
- 16- State ceiling is the greater of $9 times state population or $12 million, plus carryforward of unused allocations (with a 3-year sunset on any carried-forward amount).
- 17- States must adopt a Qualified Allocation Plan to prioritize projects (e.g., need for new or rehabbed owner-occupied homes, neighborhood stability, sponsor capability, and long-term homeownership potential), provide public comment, and publish annual reporting on allocations.
- 18Repayment, liens, and hardship waivers
- 19- If a qualified residence is sold within five years after the affordable sale, the seller must repay a share of the gain to the neighborhood homes credit agency; the agency can forgive the repayment in hardship cases (e.g., divorce, disability, illness).
- 20- A lien is placed on each project/residence to secure potential repayment.
- 21- Repayment percentages start at 50% and decline by 10 percentage points for each year of the five-year period.
- 22Owner-occupied rehabilitation and related flexibility
- 23- There are special provisions for qualified rehabilitation projects under which a different calculation can apply (up to 50% of rehab costs or $50,000, whichever is lower), with additional rules about timelines, eligible homeowners, and related-census-tract expansions.
- 24Other notable provisions and integration with the tax code
- 25- The credit is treated as part of the general business credit, and is available for AMT purposes.
- 26- Provisions affect other credits and basis rules, but include protections to avoid double counting, and to ensure energy subsidies related to qualified residences are treated separately.
- 27- New rules for energy subsidies exclude the value of state energy subsidies for qualified residences from gross income (state energy subsidies not taxable to the recipient for energy improvements).
- 28Effective date
- 29- The amendments apply to taxable years beginning after December 31, 2025.