The Neighborhood Homes Investment Act (H.R. 2854/S. 1686) was introduced in the House in April and more recently in the Senate, with bipartisan backing in both chambers. The legislation seeks to create a new federal tax credit to support the construction or substantial rehabilitation of affordable, owner-occupied homes in neighborhoods where development costs exceed market values.

Modeled after the Low-Income Housing Tax Credit (LIHTC) program, the bill is intended to spur private investment in areas that have long lacked new housing activity. It offers a way to stabilize communities where LIHTC units already operate, helping prevent cycles of vacancy and disinvestment by supporting first-time homebuyers in the same neighborhoods. With its mix of federal standards, state-level discretion, and income-targeted benefits, the proposal aligns with the operating environment LIHTC stakeholders already know.

At its core, the credit is designed to close the “value gap” found between the cost to build or rehab a home and what that home can be sold for, especially in distressed areas. The legislation allows state agencies to allocate tax credits to project sponsors who raise capital from investors. After the home is completed and sold to an income-qualified homebuyer, the investor receives the one-year federal tax credit. If a project fails to produce a sale within five years, the credit is forfeited.

The credit is capped at 40 percent of the lesser of total development costs or 28 percent of the national median sales price for new homes. Eligible homes must be sold to buyers earning no more than 140 percent of area median income (AMI), with a lower threshold of 120 percent AMI in “locally designated” communities. A resale restriction applies for five years to discourage speculative investment.

The mechanics of the Neighborhood Homes Credit would mirror the LIHTC program in several ways. Oversight of the program would be shared by the IRS and Treasury Department. Each state would receive annual allocations based on population, with a $12 million minimum, and would be required to develop a Qualified Allocation Plan (QAP) subject to public comment. These QAPs would define how states prioritize credit awards based on neighborhood need, sponsor capacity, and long-term sustainability of homeownership. Ten percent of each state’s annual credits would be reserved for nonprofit sponsors.

States must then allocate at least 60 percent of their credits to census tracts that meet a set of distress indicators such as low median income, high poverty rates, and depressed home values. However, up to 20 percent of credits may go to “locally designated” areas chosen by the state, giving agencies flexibility to respond to changing local needs. Small states receiving the minimum allocation would be permitted to devote up to 40 percent to these tracts.