Program guidance for affordable housing: recently released IRS guidance documents regarding tax credits for communities help clarify nebulous areas of the tax code, including the safe harbor procedure, recertification waivers and leasing vacant units.

The Internal Revenue Service (IRS) recently issued several rulings that offer guidance to the owners, developers and managers of tax-credit communities. The guidance documents include one revenue ruling and two revenue procedures. A revenue ruling usually addresses a particular question or questions about an aspect of the Internal Revenue Code and applies to the program as a whole. A revenue procedure usually defines how an owner or state housing agency should implement a facet of the program.

Safe Harbor Procedure

Revenue Procedure 2003-82 is often referred to as the "safe harbor" procedure. It outlined for owners a safe harbor they could use to ensure credits were not lost as a result of over-income residents being in place at the start of the first tax year. This situation may arise when a community defers credits. If the owner "test" or recertifies the income of the households before the end of the first month of the first tax year, the owner can use the safe harbor if an over-income resident is discovered. Credits can be claimed oil units qualified after the placed-in-service date and prior to the first tax year, provided the available unit rule is followed.

Recertification Waiver 

Revenue Procedure 2004-38 addresses the recertification waiver authorized in Internal Revenue Code Section 42, superceding Revenue Procedure 94-64. While not significantly different than the previous procedure, 2004-38 clarifies the process for issuing recertification waivers. The most critical aspect of the new procedure for the owners and managers of tax credit communities is when the waiver takes effect. Revenue Procedure 2004-38 allows an owner to discontinue processing recertifications on or after the date the IRS approves the waiver application.

This change allows the owner and manager to begin enjoying immediately the cost savings and efficiencies generated by the waiver, unlike in the past when the waiver could not be implemented until the start of the next tax year.

Form 8877 was created to help state agencies and owners process the waiver.

Additionally. 2004-38 clearly states the waiver may be revoked for cause by the IRS, based on its own investigation or at the behest of the state agency. Such a penalty was not explicit in the previous procedure.

The procedure also addresses the status of the waiver if there is a change in ownership. Should a community change owners, the new owner must qualify for a waiver if he or she wants to implement the recertification waiver. The waiver does not transfer with a change in ownership.

Questions and Answers

2004-82 is a lengthy "questions and answers" ruling covering 12 separate questions. The topics range from the impact of HOME funds on the basis of a project to the use of an affidavit for certifying child support. Four questions and answers are most relevant to the managers of affordable housing: Nos. 5, 8, 9 and 10.

No. 5: Just Cause Language.

Question and answer No. 5 concerns the "good" or "just" cause lease language in Section 42. The IRS was asked whether the prohibition on the eviction of a resident or termination of a lease without good cause extends throughout the extended use period or only during the three years following a foreclosure. The IRS responded that the prohibition covers the entire period of extended use (30 years). The IRS has recommended that state agencies amend all restrictive covenants. The IRS and state agencies continue discussing implementation of this change.

No. 8: Qualification of Units. Question and answer No. 8 concerns a perennial question: Can a household qualify more than two units in any one year? The IRS answered with a definitive "No." A household cannot qualify more than one unit. Some controversy has resulted from the interpretation of this answer.

Since the release of this answer, some in the tax-credit community have suggested that the answer was sufficient grounds to allow residents to transfer between buildings without completing a new resident income certification. Past practice generally has been to prepare a new income certification when transferring a household between buildings.

During a recent conference with state housing finance agencies, IRS staff indicated that answer No. 8 was not intended to apply to unit transfers. The IRS further suggested that the policy of preparing income certifications when transferring households between buildings be continued.

Nos. 9 and 10: Vacant Units. Question and answer No. 9 and question and answer No. 10 both clarify aspects of the vacant unit role. Answer No. 9 outlines the due diligence a management company must pursue when leasing vacant market units when the community has vacant low-income units. According to Answer No. 9, owners who have made reasonable efforts to market vacant low-income units may lease market units before low-income units. Be sure to carefully document how low-income units were being leased, including keeping copies of advertisements, correspondence and pictures of signs posted at the community site. Answer No. 10 specifically addresses leasing market units before low-income units and the impact of a signed agreement or other understanding with a low-income resident on the decision to lease. According to Answer No. 10, a low-income unit covered by a pre-lease agreement or other arrangement is not available as defined under the unit vacancy rule. Thus, an owner who leases a market-rate unit when low-income units are "reserved" will not be considered out of compliance. As with many aspects of the tax credit program, seeking an interpretation of these answers from the state housing agency is recommended.

Catch-All Language

In response to considerable input from state housing agencies and the owners and managers of tax credit projects, the IRS issued a Revenue Procedure on June 21 that addresses question No. 5 in Revenue Ruling 2004-82.

Specifically, 2005-37 provides a safe harbor to state agencies that incorporated "catch-all" language in the restrictive covenants required under the tax credit program. The catch-all language normally indicates that the owner of the tax credit community must follow all roles of the tax credit program.

State agencies that included this language must specifically include language prohibiting no-cause lease terminations starting in 2006, but are not required to amend restrictive covenants entered into previously. States with covenants that do not include catch-all language, or that do not directly address just cause lease termination, will be required to amend the restrictive covenants in question.

A careful reading of the four IRS releases outlined above will yield additional important information, ensuring that the owners and managers of tax credit communities are in compliance and provide the best apartment communities for their residents. Copies of the IRS publications can be found at www.irs.gov.

Brian Carnahan works at the Ohio Housing Finance Agency as Assistant Director of the Office of Program Compliance. He previously worked in the agency's development office. He can be reached at [e-mail].