Neighborhood Homes Act Proposes Tax Credits to Build & Rehab Housing in Distressed Areas After 2025

This bill, the Neighborhood Homes Investment Act, introduces a new federal tax credit designed to encourage the construction and major renovation of homes in specific underserved communities. Starting after December 31, 2025, it aims to tackle housing shortages by making it financially viable to build or fix up homes where the cost of doing so is currently higher than the property's market value – what the bill calls the 'value gap'.

Bridging the 'Value Gap': How the Credit Works

The core idea is the new 'Neighborhood Homes Credit' (proposed Internal Revenue Code Section 42A). Think of it like this: if it costs a developer $200,000 to build a house in a designated neighborhood, but it can only sell for $160,000 to an eligible buyer, this tax credit could help cover that $40,000 difference, making the project possible. The actual credit amount is the lesser of several calculations, including this gap, a percentage of development costs (40%), or a cap based on the national median home price (32%). 'Development costs' cover things like construction, rehab, and even environmental cleanup, but there are limits on how much land acquisition counts. For a renovation to qualify as 'substantial rehabilitation,' the costs need to be over $25,000 or 20% of what was paid for the property.

Who Qualifies? Location, Buyers, and Builders

This isn't for just any neighborhood or any buyer. The credits target 'qualified census tracts' – areas identified based on factors like lower median family income, higher poverty rates, or lower home values compared to the surrounding area, potentially including disaster zones too. The homes built or rehabbed (1-4 units, condos, or co-ops) must be sold in an 'affordable sale' to a 'qualified homeowner'. That means the buyer must intend to live there as their primary residence and have a family income at or below 140% of the area median income. The sale price itself is capped based on that median income (generally 4 times median income for a single-family home). Developers apply for the credit, but there's also a provision for existing homeowners in these tracts doing major rehabs – they could get an alternative credit up to $50,000.

States Call the Shots on Allocation

This isn't a free-for-all. Each state gets a set amount of credit authority ($9 per person or $12 million, whichever is higher, plus rollovers) to distribute. A designated state 'neighborhood homes credit agency' is responsible for creating a 'qualified allocation plan' to decide which projects get the credits. These agencies will set standards for development costs and construction quality, ensure developers protect homeowners, and report annually on how the credits are used. They're also tasked with outreach to help potential applicants understand the process.

Strings Attached: The 5-Year Rule

There's a catch for homeowners who buy these properties. If you sell the home within five years of the initial 'affordable sale,' you might have to repay a chunk of the gain back to the state agency. The repayment amount starts at 50% of the gain in the first year and drops by 10% each year, hitting zero after five years. To enforce this, the state agency places a lien on the property. There are exceptions for hardship cases like divorce or disability. Also, if the property is converted to a rental within those five years, certain tax deductions are denied.

Integrating the Credit: Tax Code Tweaks

The bill weaves this new credit into the existing tax system. It officially adds Section 42A and incorporates it into the general business credit calculation (Section 38). It also requires adjustments to the property's cost basis (how its value is calculated for tax purposes) if this credit is claimed, similar to rules for other energy credits (amending Sections 25C(g), 25D(f), 45L(e)). Other technical changes are made, including excluding certain state energy subsidies from income (new Section 139J). Remember, these changes apply to tax years starting after December 31, 2025.