LIHTC and Opportunity Zones were designed for different purposes. But when they’re layered on the same project — especially after the OBBBA’s 2025 enhancements — the combined tax benefit is unlike anything else in the affordable housing toolkit. Here’s how the stack works, why it matters for rural communities, and what it takes to close.
The Low-Income Housing Tax Credit has financed nearly four million affordable homes since 1986. It is the single largest source of affordable rental housing production in the United States, covering roughly 90% of all new affordable construction. Opportunity Zones, created by the Tax Cuts and Jobs Act of 2017, were designed to attract a different pool of capital — individuals and entities with unrealized capital gains — into underinvested communities. Together, they represent two of the most powerful place-based incentives in the federal tax code.
In theory, stacking them is a natural fit: most designated OZs have troubled housing markets with vacancy rates of 13%, rent-burdened households as high as 53%, and median home values roughly $48,000 below the national average. In practice, twinning the two programs has been rare but not impossible — and the One Big Beautiful Bill Act of 2025 has changed the calculus in ways that make the combination significantly more attractive.
This paper explains the mechanics, identifies the practical barriers and how the OBBBA resolves them, walks through the deal structures that work, and presents illustrative examples drawn from Riverstone’s development pipeline.
The One Big Beautiful Bill Act, signed July 4, 2025, enacted the most significant expansion of affordable housing incentives in more than two decades. It enhanced both LIHTC and Opportunity Zones simultaneously — and the interaction between the two sets of changes is where the real opportunity lies.
Permanent 12% increase in 9% allocations. Starting in 2026, every state receives 12% more 9% credit authority. According to Novogradac, this single change could finance 1.22 million new affordable rental homes between 2026 and 2035. The 9% credit is oversubscribed in every state, so even a modest increase creates meaningful new deal flow.
Bond threshold reduced from 50% to 25%. To qualify for 4% LIHTC credits, a project’s aggregate basis must be financed with tax-exempt private activity bonds. The OBBBA permanently lowers that threshold from 50% to 25%, effective for projects placed in service after December 31, 2025. This is transformative: more than 20 states were at or near their bond volume caps. The reduction frees roughly one-third of previously committed bonds for new deals.
100% bonus depreciation restored. The OBBBA permanently reinstates 100% bonus depreciation for qualified property acquired after January 19, 2025. For LIHTC investors, this front-loads tax losses and improves after-tax yields — particularly when paired with cost segregation studies in 4% deals.
FHFA doubles GSE equity capacity. Separately, the Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac can each invest up to $2 billion annually in LIHTC equity (up from $1 billion each). Half of the combined $4 billion is reserved for difficult-to-serve markets, with at least 20% earmarked for rural communities.
Permanent program. OZs are now a permanent part of the tax code, with new 10-year designation cycles beginning in 2027. This removes the sunset uncertainty that deterred long-horizon investors.
Rural super-tier. Qualified Rural Opportunity Funds (QROFs) receive a 30% basis step-up after five years (versus 10% for standard OZs), and the substantial improvement threshold drops from 100% to 50% in rural zones — effective immediately. The Treasury has identified 3,309 qualifying rural tracts.
New reporting requirements. The OBBBA requires public impact data on jobs, housing units, and income levels from QOFs and QOZ businesses — which should increase transparency and investor confidence over time.
LIHTC provides dollar-for-dollar credits against federal income tax, claimed over 10 years. OZ provides deferral and reduction of capital gains tax, plus permanent exclusion of gains on the OZ investment after 10 years. The two mechanisms operate on different parts of an investor’s tax return and are not mutually exclusive — an investor with both ordinary income tax liability and capital gains can benefit from both simultaneously.
OZ tracts were selected from the same low-income community census tracts used by LIHTC’s New Markets Tax Credit cousin. Most designated OZs meet or exceed LIHTC’s income and rent test thresholds. A LIHTC project sited in an OZ tract doesn’t need to stretch to meet either program’s geography requirements — the overlap is structural.
OZ’s “original use” requirement is easiest to meet with new construction — which is also where the 9% LIHTC credit is most commonly deployed. A ground-up affordable housing project on vacant land in an OZ tract meets both programs’ requirements without any structural gymnastics. Under the OBBBA’s reduced 50% substantial improvement threshold for rural zones, rehabilitation projects also become viable OZ candidates for the first time.
Even the most generous LIHTC allocation rarely covers 100% of a project’s equity need. Developers routinely assemble gap sources — HOME, Housing Trust Fund, deferred fees, state credits. OZ equity from a Qualified Opportunity Fund represents a new, additive source of gap capital. Based on preliminary modeling by Boston Financial and others, OZ equity can fund 2% to 8% of total equity in a stacked deal, depending on the transaction profile and investor appetite.
Traditional LIHTC investors are primarily banks motivated by CRA requirements. Banks often don’t have significant capital gains. OZ brings in a different investor profile: family offices, high-net-worth individuals, and corporations with substantial capital gains and income tax liability who can use both the LIHTC credit and the OZ deferral. This expansion of the investor base is particularly important in rural markets and smaller deals where bank appetite may be limited.
Legal scholarship by Sierra R. M. Williams in the Journal of Affordable Housing has documented three primary structures for twinning OZ and LIHTC. Each has distinct advantages depending on the number of projects, the type of investor, and the amount of capital gains being deployed.
The simplest approach. Investors pool qualified capital gains into a QOF, which invests 100% of its assets directly into a LIHTC project that qualifies as a Qualified Opportunity Zone Business (QOZB). A developer or affiliate serves as a 1% general partner, with LIHTC credits flowing back through the QOF to investors. This eliminates the 90% QOZP test at the QOF level (since the QOF holds its interest directly in the QOZB) and is the cleanest structure for a single-project deal.
For developers investing in multiple LIHTC projects simultaneously. The QOF invests 100% of assets into an operational limited partnership as a limited partner, with the partnership interest qualifying as QOZP. The operational partnership and its subsidiary LIHTC projects qualify as a QOZB. Multiple developers can serve as general partners across multiple projects, with credits flowing up through the operational partnership to the QOF. The key requirement: the operational partnership must own or lease the actual property to avoid being treated as a passive investment.
For institutional investors who want maximum benefit. An investor simultaneously invests capital gains through a QOF (capturing OZ deferral) and directly invests additional equity into the LIHTC project (capturing LIHTC credits on the non-OZ portion). This “sidecar” approach allows a greater combined incentive per investor and is particularly attractive for family offices and corporate investors with both capital gains and ordinary income tax liability.
The first years of LIHTCs saw pricing in the $.40s. It took a few years for the market to mature. It’s the same with OZs. For the first LIHTC deals using OZ funding, the economic benefit above the LIHTCs will likely be modest. Get it done, put a notch on your belt, and let’s keep talking about how we’d like to see OZ develop. — Nixon Peabody, “Top 5 Ways to Use Opportunity Zone Funds in LIHTC Deals”
The old rule: To qualify an existing building for OZ benefits, an investor had to spend 100% of the building’s adjusted basis on improvements — essentially doubling the investment. For most LIHTC acquisition-rehab deals, this was a non-starter.
The OBBBA fix: In rural OZ tracts, the threshold drops to 50%, effective immediately. A $1M rural building now needs $500K in improvements to qualify. This opens the door for 4% LIHTC preservation and rehab deals to pair with OZ for the first time in rural markets.
The old rule: LIHTC requires a 15-year initial compliance period (plus a 15-year extended use period). OZ requires a 10-year hold for full gain exclusion. An investor exiting the OZ position at year 10 could trigger LIHTC recapture, which runs for 15 years.
The practical solution: Structure the deal so the OZ investor remains in the partnership for the full LIHTC compliance period. The OZ 10-year exclusion still applies to gains at exit after year 15. With OZs now permanent, investors have more certainty that the program rules won’t change mid-hold.
The reality: CRA-motivated banks are the backbone of LIHTC investment. But banks rarely have the capital gains that trigger OZ benefits.
The opportunity: OZ brings in new investors — family offices, high-net-worth individuals, and corporate investors — who have significant capital gains and can use both LIHTC credits and OZ deferral. The sidecar structure is particularly well-suited to this investor profile. The FHFA’s doubled GSE equity capacity also expands the institutional buyer pool.
The old reality: Lower rents, higher per-unit costs, thinner appraisals, and limited investor appetite made rural affordable housing the hardest category to finance.
The OBBBA fix: The rural QROF’s 30% basis step-up makes OZ equity meaningfully more valuable in rural deals. Combined with the 12% increase in 9% LIHTC allocations, the 25% bond threshold for 4% credits, restored 100% bonus depreciation, and the FHFA’s 20% rural earmark on GSE equity — the capital stack for a rural LIHTC + OZ deal is dramatically more feasible than it was 18 months ago.
A 40-unit workforce housing project on vacant land in a rural OZ tract. The developer applies for and wins 9% competitive LIHTC credits through the state HFA. A Qualified Rural Opportunity Fund contributes gap equity from investors rolling capital gains. The project also layers Housing Trust Fund, a USDA Section 538 loan guarantee, and a Rural Housing Improvement District for infrastructure.
| Source | % of Stack | Illustrative $ | Benefit to Investor |
|---|---|---|---|
| 9% LIHTC Equity | 50–60% | $5.8M | Dollar-for-dollar income tax credit over 10 yrs |
| QROF Equity (OZ) | 8–12% | $1.0M | Capital gains deferral + 30% step-up + gain exclusion |
| Permanent Debt | 15–20% | $1.8M | USDA 538 guaranteed, below-market rate |
| Housing Trust Fund | 4–6% | $500K | Soft debt, enables deeper affordability |
| RHID / Local Sources | 3–5% | $400K | Infrastructure & tax increment support |
| Deferred Developer Fee | 3–5% | $350K | — |
Illustrative. Actual capital stacks are customized per project. ~$9.85M total development cost.
Why it works: The 9% credit covers the majority of equity need. QROF equity fills the gap that would otherwise require additional soft debt or deferred fees. The rural 30% step-up makes the OZ position attractive enough to compete with market-rate OZ investments for investor capital. New construction on vacant land satisfies OZ’s “original use” test cleanly.
A closed rural school building (National Historic Register eligible) converted into 30 units of senior affordable housing. The developer uses 4% LIHTC with tax-exempt bonds, federal Historic Tax Credits (20% of QREs), state Historic Tax Credits, and QROF equity. The OBBBA’s reduced 50% substantial improvement threshold makes the OZ component viable — at $800K acquisition and $600K in rehab, the project exceeds the 50% rural threshold.
Why it works: Triple-stacking HTC + LIHTC + OZ on a historic rehabilitation in a rural zone captures three separate credit programs on a single project. The 25% bond threshold means less of the state’s bond cap is consumed. The HTC basis adjustment reduces LIHTC eligible basis, but the net trade — giving up modest LIHTC equity to capture HTC and OZ equity — is clearly positive.
A 60-unit mixed-income family development in an urban OZ tract. A family office investor deploys capital gains through a QOF (capturing OZ deferral and future gain exclusion) and simultaneously invests additional equity directly into the LIHTC partnership (capturing LIHTC credits). The sidecar structure maximizes total tax benefit per investor dollar and gives the family office exposure to both incentive programs in a single investment.
Why it works: Family offices are an undertapped source of LIHTC investment. They have both capital gains (for OZ) and ordinary tax liability (for LIHTC), fewer bureaucratic constraints than banks, and are often directly motivated by the community impact mission of affordable housing. The sidecar structure was specifically identified by practitioners as the highest-potential structure for expanding the LIHTC investor base through OZ.
Riverstone Platform Partners focuses exclusively on workforce, attainable, and affordable housing. We have spent thirty years assembling the multi-source capital stacks that rural and underserved markets require — layering federal and state LIHTC, Historic Tax Credits, USDA programs, Housing Trust Fund, Rural Housing Improvement Districts, and local incentives into structures that actually close. Adding OZ equity to that toolkit is a natural extension of what we already do.
Our current and recent projects include communities that sit within or adjacent to designated Opportunity Zones — from Newton, Kansas (Hope Estates, 38 units with EmberHope) to Moundridge, Kansas (30-unit workforce housing) to Kansas City’s Guadalupe Centers campus (50-unit mixed-income). Future phases and new projects in qualifying tracts can be structured to layer QROF equity alongside LIHTC.
Riverstone’s partnerships with EmberHope Inc., Metro Lutheran Ministries, Guadalupe Centers, and Missouri Lutheran Family and Children Services create developments that deliver more than shelter — they deliver supportive services, workforce development, and community stability. For OZ investors seeking measurable social impact alongside tax benefits, mission-driven affordable housing offers exactly the kind of community transformation the OZ program was designed to catalyze.
Our Baxter Springs Senior Living project — a former school building converted to National Historic Register affordable senior housing — is a prototype for the rural HTC + LIHTC + OZ triple-stack the OBBBA now enables. The 50% substantial improvement threshold makes dozens of similar adaptive reuse opportunities viable across the 3,309 qualifying rural OZ tracts.
State housing finance agencies control QAP scoring and credit allocation. Some are already incorporating OZ status as a scoring factor; others haven’t yet. Developers should advocate for QAP recognition of OZ location and monitor how each state implements the OBBBA’s expanded 9% allocation and 25% bond threshold.
The 12% credit increase and restored bonus depreciation could push LIHTC equity pricing up as investor demand grows. But higher construction costs, interest rate uncertainty, and tariff-related material cost volatility are countervailing pressures. Developers who lock in commitments early will be best positioned.
The OBBBA mandates new public disclosure of OZ fund activity — including jobs created, housing units produced, and income impacts. Developers and fund sponsors should build reporting infrastructure now rather than retrofitting after the rules are finalized.
OZ capital — even when directed toward affordable housing — carries gentrification risk. Policymakers and practitioners must pair OZ investment with affordability covenants, community engagement, and long-term compliance monitoring. LIHTC’s built-in 30-year affordability restriction provides a strong foundation, but additional protections may be warranted in rapidly changing neighborhoods.
If you’re an investor exploring OZ + LIHTC, a municipality with OZ tracts and housing need, or a nonprofit seeking a development partner — Riverstone has the experience to make the math work.
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