Neighborhood Homes Investment Act

Bill Number: S. 1686
Origin Chamber: Senate
Congress: 119th Congress, Session 1
Policy Area: Taxation
Status: Introduced
Latest Action: 2025-05-08: Read twice and referred to the Committee on Finance.
Last Updated: 2026-02-06T18:52:05Z

AI-Generated Summary

Purpose

The Neighborhood Homes Investment Act (S. 1686) aims to address housing shortages in the United States, particularly in low-income and distressed communities, by creating a new federal tax credit to encourage the construction, substantial rehabilitation, and sale of affordable owner-occupied homes. It seeks to bridge financing gaps caused by high development costs relative to sale prices, promote homeownership as a source of wealth and neighborhood stability, and support revitalization in both urban and rural areas while aligning with fair housing principles.

Key Provisions

Tax Credit Structure (Section 42A of the Internal Revenue Code):
Provides a "neighborhood homes credit" as part of the general business credit, allowable against regular tax and alternative minimum tax (AMT).
Credit amount per qualified residence sold in an "affordable sale" is the lesser of:
The excess of reasonable development costs over the sale price (up to 120% if needed for financial feasibility).
40% of eligible development costs (excluding most land acquisition costs).
32% of the national median sale price for new homes (based on recent census data).
Applies to taxable years beginning after December 31, 2025.

Qualified Residences and Locations:
Includes single-family homes (up to 4 units), condominiums, or cooperative housing units that are permanently affixed and suitable for owner-occupancy.
Must be in "qualified census tracts," defined as areas with low median family income (≤80% of area median), high poverty (≥130% of area rate), and low home values, or specific designations for rural areas, disaster zones, or shortages of affordable owner-occupied homes.
The U.S. Department of Housing and Urban Development (HUD) will publish annual lists of these tracts.

Affordable Sales and Homeowners:
Sale price capped at 4 times the area median family income (adjusted upward for 2–4 unit homes: 125–175%).
Buyer must be a "qualified homeowner" with family income ≤140% of area median and use the home as their principal residence.
Related-party sales (e.g., between family or controlled businesses) are excluded.

State Allocations and Ceilings:
State governors designate "neighborhood homes credit agencies" to allocate credits via a public "qualified allocation plan" prioritizing need, neighborhood impact, sponsor capability, and long-term homeownership.
Annual state ceiling: Greater of $9 per capita or $12 million, with 3-year carryforward of unused amounts; includes returned funds from expired projects.
At least 20% set-aside for rural/non-metro, disaster, or shortage areas (up to 40% in smaller states); additional 20% for broader shortage areas with relaxed income limits.
Projects must complete sales or rehabilitations within 5 years of allocation.

Development Costs and Rehabilitation:
"Reasonable development costs" cover acquisition, construction, substantial rehab (≥$25,000 or 20% of acquisition cost), demolition, and remediation, certified by the state agency for feasibility.
Costs before allocation generally excluded (except land/building acquisition within 3 years).
Special provision for owner-occupied rehabilitations: Up to $50,000 credit (50% of certified rehab costs) for existing low-income homeowners (≤100% area median) in qualifying areas, including pyrrhotite-damaged foundations; no location restriction for some rehabs.

Agency Responsibilities and Reporting:
Agencies must minimize burdens on small builders, ensure construction quality meets local codes, protect homeowners in rehabs (e.g., disclosure of costs), and provide outreach.
Annual reports to IRS on allocations, completions, costs, sales, and buyer incomes (de-identified for privacy).
IRS issues public annual reports; agencies explain deviations from plans.

Repayment and Enforcement:
If sold within 5 years, seller repays 50% of gain (decreasing 10% per year) to the state agency for reuse in projects; secured by a lien.
Waivers for hardships (e.g., divorce, disability); no deduction for rental use during this period.
Prevents abuse: No credit for pre-allocation costs; related-party rules; regulations to curb avoidance.

Other Rules:
Inflation adjustments for key dollar amounts starting 2026.
Excludes state energy subsidies for qualified residences from gross income.
Basis adjustments ensure energy efficiency credits (e.g., Sections 25C, 25D, 45L) do not overlap with this credit.

Significant Changes to Existing Law

Adds a new Section 42A to the Internal Revenue Code, modeled after the low-income housing tax credit (LIHTC, Section 42) but tailored for owner-occupied single-family homes rather than rentals.
Integrates the credit into the general business credit (Section 38) and AMT allowance, expanding eligibility.
Introduces exclusions for state energy subsidies (new Section 139J) and modifies basis rules for energy credits to avoid double benefits.
Amends passive activity loss rules (Section 469) to include this credit, treating it similarly to LIHTC for tax purposes.
No changes to core tax code structure but creates a parallel system for homeownership incentives, emphasizing distressed areas over broad low-income rentals.

Potential Impacts

On Citizens: Increases supply of affordable starter homes and repair options in underserved areas, potentially boosting homeownership rates, household wealth, and neighborhood stability for low- and moderate-income families (up to 140% of area median). Reduces financing barriers for builders, leading to more quality housing without excessive costs passed to buyers.
On Government Agencies: State agencies gain new administrative roles (allocations, reporting, liens), increasing workload but with federal guidance; IRS handles credit claims and abuse prevention; HUD provides tract designations. Could recycle repaid funds to sustain program without ongoing appropriations.
On International Relations: None directly; focuses on domestic housing policy.

Main Stakeholders Affected

Developers and Builders: Small residential builders and remodelers benefit from credits covering cost gaps, with minimized application burdens.
Low-Income Homebuyers and Owners: Gain access to affordable new or rehabbed homes and repair incentives, targeted at families in distressed communities.
State and Local Governments: Agencies administer allocations and enforce repayments; local jurisdictions see revitalized areas aligning with fair housing and building codes.
Federal Agencies: IRS (tax administration), HUD (tract lists), and Treasury (regulations and reporting).
Nonprofit Organizations: Eligible for set-aside allocations, supporting community-focused projects.
Taxpayers Generally: Indirectly, through reduced federal tax revenue from credits (estimated via state ceilings).

Notable Legal, Constitutional, or Political Implications

Legal: Mandates consistency with the Fair Housing Act (1968) to prevent discrimination; includes anti-abuse rules (e.g., related-party exclusions, pre-allocation cost limits) and IRS regulations to ensure credits target intended uses. Repayment liens and waivers provide flexibility but require clear hardship definitions to avoid disputes.
Constitutional: Relies on Congress's taxing and spending powers (Article I, Section 8), a standard mechanism for housing incentives; no apparent free speech, property, or equal protection issues, as it promotes broad access in defined distressed areas.
Political: Bipartisan sponsorship (e.g., Sens. Young, Warner, Wyden) signals cross-party support for addressing housing crises; emphasizes rural/urban equity and disaster recovery, potentially influencing future affordability policies. Public reporting and transparency requirements enhance accountability but may invite scrutiny of allocations.

This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.

Sponsor

Sen. Young, Todd [R-IN]

Cosponsors (9)

Sen. Warner, Mark R. [D-VA], Sen. Hyde-Smith, Cindy [R-MS], Sen. Wyden, Ron [D-OR], Sen. Cramer, Kevin [R-ND], Sen. Kaine, Tim [D-VA], Sen. Scott, Tim [R-SC], Sen. Coons, Christopher A. [D-DE], Sen. Moran, Jerry [R-KS], Sen. Durbin, Richard J. [D-IL]