Bond Financed-By Test
Enter your deal's aggregate basis, total tax-exempt bond proceeds, and the placed-in-service year. The calculator tells you which threshold applies (50% pre-OBBBA vs. 25%/5% post-OBBBA), whether you pass, and how much headroom or shortfall exists.
Test breakdown
| Component | Amount | % of basis | Required | Status |
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What it would take
| Scenario | Required bond amount | Gap from current |
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How this test works
IRC §42(h)(4) lets a 4% LIHTC building bypass its state's competitive Housing Credit ceiling (the 9% cap) by sourcing a meaningful portion of its capital from tax-exempt private activity bonds (PABs). If the financed-by threshold is met, the 4% credit is awarded "as of right" — no competition required. The threshold is the gatekeeper between a deal that can use 4% bond financing and one that needs to compete for 9% allocation.
Pre-OBBBA (placed in service through Dec 31, 2025)
- 50% test: Aggregate basis financed by tax-exempt bonds must be at least 50% of total aggregate basis.
- Aggregate basis = land + the building's full development (adjusted) basis. It is broader than §42(d) eligible basis: land is included, and commercial space and off-site costs that eligible basis excludes stay in. Do not enter eligible basis here — it understates the denominator.
Post-OBBBA (placed in service after Dec 31, 2025)
§70422 of OBBBA (P.L. 119-21, signed July 4, 2025) added a permanently reduced 25% pathway — with a guardrail. A post-2025 building qualifies via either pathway:
- Pathway A — 50% test (unchanged): At least 50% of aggregate basis financed by tax-exempt bonds, regardless of issue date. Still fully available.
- Pathway B — 25% test: At least 25% of aggregate basis financed by tax-exempt bonds, and at least 5% of aggregate basis from bonds issued after December 31, 2025 (both conditions must be met).
- The 5% requirement prevents deals from drafting on the lower 25% threshold using only legacy pre-2026 bond issuances — but a deal that clears 50% with legacy bonds still qualifies via Pathway A.
This calculator runs the bond financed-by test only. It does not address state volume cap availability, refunding bond rules under §146, the "qualified residential rental project" requirements of §142(d), basis boost interactions, or the placed-in-service deadlines under §42(h)(1). Always verify against the closing memo and bond counsel's opinion before relying on this result for an allocation request.
FAQ
What counts as "aggregate basis" for this test?
Per IRC §42(h)(4)(B), aggregate basis = the full development/depreciable basis of the building (its adjusted basis, including commercial space and off-site costs that §42(d) excludes from eligible basis) plus the basis of the land on which the building is located. It is broader than the §42(d) eligible basis used to compute credits in two ways: (1) land is included even though land is excluded from eligible basis, and (2) costs such as commercial space and off-site land improvements that §42(d) strips from eligible basis remain in aggregate basis. Most practitioners also include construction-related soft costs financed alongside the building.
Why did OBBBA reduce the threshold from 50% to 25%?
The 50% test had become a binding constraint as PAB volume caps stayed flat while LIHTC deal sizes grew. Many states ran out of bond cap, forcing deals to issue more bonds than they actually needed (often parking the proceeds in escrow for short-term financing) just to hit 50%. Lowering to 25% lets deals use bonds for their economic purpose — typically construction-period financing — without inflating the bond stack purely to clear the test.
The 5% post-2025 requirement was added to ensure the rule encourages new bond issuance volume rather than retroactively benefiting deals that already used pre-2026 bonds.
Do refunding bonds count?
Refunding bonds issued under §146(i) generally count toward the financed-by test, but with nuances. A refunding of a pre-2026 bond may or may not satisfy the post-OBBBA 5% post-2025-bond requirement depending on the structure — talk to bond counsel before assuming a refunding counts as "issued after Dec 31, 2025" for §42(h)(4) purposes.
What if my deal fails the test?
If you fail the financed-by test, you can't use the 4%-as-of-right path. Options: (a) increase tax-exempt bond proceeds to meet the threshold, (b) restructure to reduce aggregate basis (rare and usually counterproductive), or (c) compete for 9% LIHTC allocation in the next state QAP round.
For deals that meet the 25% threshold but miss the 5% post-2025-bond requirement, the fix is usually straightforward: issue some incremental new bonds after Dec 31, 2025 to bridge to 5%.
Is this calculator authoritative?
No — it's a planning tool. The financed-by test has interactions with bond counsel opinions, §142(d) qualified residential rental project requirements, basis allocation between buildings in a project, and state HFA-specific guidance. Always run the result by your bond counsel and tax counsel before relying on it for an allocation request or closing.