50 Percent Test (Bond Financing Test)

What Is the 50 Percent Test?

The 50 percent test is the rule that unlocks “automatic” 4% tax credits. Normally, a building can receive Low-Income Housing Tax Credits only from its state’s annual allocation, which is capped by population. Section 42(h)(4) of the Internal Revenue Code makes an exception for buildings financed with tax-exempt private activity bonds that count against the state’s bond volume cap.

For decades the rule required that at least half of a building’s cost be financed that way, hence the name. Since 2026, a lower 25% threshold is available, so the rule is also called the 25% test or the bond financing test.

How It Works

The test compares two numbers:

• The aggregate basis of the building and the land it sits on. Unlike eligible basis, this includes land.
• The amount financed by volume-cap tax-exempt bonds.

Under current law, a building passes if either:

1. bonds finance 50% or more of the aggregate basis, or
2. bonds finance 25% or more, and at least one bond issue dated after December 31, 2025 finances at least 5%.

The 25% option was added by Public Law 119-21, signed July 4, 2025. It applies to buildings placed in service in tax years beginning after December 31, 2025. The Congressional Research Service describes it as a permanent change.

A building that passes receives 4% credits without competing in the state’s Qualified Allocation Plan round, though it must still meet all other credit rules.

Example

Suppose a building and its land have an aggregate basis of $40 million. Under the old rule, it needed at least $20 million of volume-cap bonds. Under the 25% option, $10 million could be enough, as long as at least $2 million came from a bond issued after 2025.

Why It Matters for Workforce Housing

Each state receives a limited amount of private activity bond authority every year. When fewer bonds are needed per project, the same bond cap can support more developments. Enterprise Community Partners, citing Novogradac estimates, reported in July 2025 that the law’s credit changes could finance 1.22 million additional affordable rentals over 10 years. Because 4% credits raise less equity than 9% credits, projects using tax-exempt multifamily housing bonds often still need other sources to close a financing gap.