Summary of the Neighborhood Homes Investment Act
The Neighborhood Homes Investment Act supports the development and rehabilitation of owner-occupied homes in communities that are struggling to attract investment in single-family homes due to low home values and high costs of construction.
The lack of move-in ready homes makes it difficult to attract or retain homebuyers, often causing property values to decline further. Neighborhood Homes would break this stalemate by creating a federal tax credit that covers the gap between the cost of building or renovating homes and the price at which they can be sold, thus making renovation and new home construction possible and offering pathways to homeownership to first-time homebuyers.
Neighborhood Homes can also be utilized to allow lower-income homeowners to rehabilitate their homes and build generational wealth.
Neighborhood Homes Tax Credit Allocations
Credits are Administered by States
Each state receives an annual allocation of credits totaling the greater of $9 per resident or $12 million; adjusted annually for inflation.
States allocate credits to “project sponsors” (e.g., developers, lenders, local governmental entities) through an annual competition. Project selection criteria include:
o Neighborhood need for new or rehabilitated homes
o Neighborhood revitalization strategy and impact
o Sponsor capability and prior performance
o Likely long-term homeownership sustainability
o Any additional state criteria
States set standards for construction cost and quality, as well as developer fees.
States can carry over unallocated amounts for three years and can also reallocate any unused credits.
The IRS promulgates regulations, collects national activity data, and monitors state agency performance and compliance.
Credits are Claimed Only After Homes are Financed
Project sponsors have five years to raise capital and complete sales or renovations of homes.
Investors may claim credits only after homes are completed, inspected, and sold or occupied by eligible homeowners.
Any credits allocated but not utilized after five years are returned to the state agency.
Credits Are Limited in Scope
New For-Sale Homes: Tax credits cover the lesser of: (i) 40% of the total eligible development costs; (ii) 32% of the national median sales price of a new home; or (iii) the actual gap between the total eligible development costs and the final sales price of the home.
Owner-Occupied Homes: Tax credits cover the lesser of: (i) 50% of the eligible rehabilitation costs; (ii) the rehabilitation costs minus any homeowner repayments; or (iii) $50,000.
State allocating agencies can provide up to 20% more credits if needed to cover additional gaps
This ensures that each home receives only the amount of credits necessary to finance gaps preventing the development, rehabilitation and/or successful sale of the home.
Credits Flow in Communities with the Highest Need
All states are required to deploy no less than 60% of their allocations in distressed communities; characterized by high poverty rates (at least 30% higher than area poverty rate), low median incomes (at or below 80% of area median income) and low home values (at or below area median home value).
Larger states (those receiving their full per capita allocation of credits) may deploy: (i) up to 20% of their annual allocations to serve other statutorily identified geographies of high need (e.g., rural communities and those recovering from a federally declared disaster; and (ii) up to 20% to serve other communities that the state has determined has a shortage of affordable single-family homes.
Smaller states (those receiving the minimum formula allocation) may deploy up to 40% of their annual allocations in any combination of items (i) or (ii) above.
Maps of eligible communities in each state may be found here.
Homes are Affordable to First-Time Homebuyers
Sales prices are limited to four times the area median family income (MFI). Example: if MFI is $90,000, the sales price limit would be $360,000. Higher limits apply to homes with 2-4 units.
For homes developed or substantially rehabilitated for sale, eligible purchasers must have incomes at or below 140% of the area median income (120% in certain communities).
A homeowner who sells a home within five years of buying the home will repay part of the gain (profit) to the state to support additional similar activity.
For owner-occupied home repairs, the homeowner must be making at or below 100% of the area median income.