IRS Limitations on Private-Activity Bonds (PABs)

Tax-exempt private-activity bonds (PABs) are proven tools to mobilize public and private co-investment in affordable housing. States and cities use PABs to borrow on behalf of private companies and nonprofits, lowering borrowing costs for entities that might otherwise turn to corporate bonds or bank loans. Interest on PABs is not excluded from gross income unless it is a qualified bond, which must meet strict requirements and serve a public benefit β€” such as affordable rental housing or mortgage provisions for first-time lower-income borrowers.


Policymakers should pass legislation that broadens the availability of private-activity bonds (PABs) by raising volume caps on the capacity of states to issue PABs, expanding the scope of projects eligible for PAB financing, and giving states flexibility to choose which kinds of projects are in most need of tax-exempt bond assistance.


TheΒ Affordable Housing Credit Improvement Act (AHCIA) introduced in May 2023 would finance nearly two million affordable homes over the next 10 years β€” partially by lowering the threshold of private activity bond financing from 50% to 25% that is required to trigger the maximum amount of 4% housing credits available to individual properties.

AΒ summary of the AHCIA outlines its many provisions, which aim to significantly expand and improve the application of the low-income housing tax credit (LIHTC). The bill (H.R. 3238Β andΒ S. 1557) is led by Sens. Maria Cantwell (D-WA) and Todd Young (R-IN), along with Reps. Darin LaHood (R-IL) and Suzan DelBene (D-WA).

President Biden’s budget proposal submitted in 2023 would also reduce the PAB financing requirement from 50% to 25% to leverage more private capital into low-income housing tax credit (LIHTC) deals to encourage the construction of more affordable housing.

Separately, the Infrastructure Investment and Jobs Act signed into law on November 15, 2021 increased the available PAB authority from $15 billion to $30 billion.

Affordable Housing
Expanding Housing Supply: Fannie Mae & Freddie Mac
Low Income Housing Tax Credit (LIHTC)
IRS Limitations on Private-Activity Bonds (PABs)
"YES In My Backyard" (YIMBY)
Surplus Federal Real Estate for Affordable Housing