Printer Friendly

Compliance monitoring for low-income housing tax credit projects.

Property managers of low-income housing tax credit (LIHC) projects should note that state housing authorities are required by Internal Revenue Service regulations to monitor taxpayers claiming the LIHC. Specifically, the states are required to monitor LIHC projects to ensure that they are complying with the requirements of Section 42 of the Internal Revenue Code and to report any noncompliance to the IRS.

The Treasury Department has drafted a new form--Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance--to be used by state allocating agencies to report noncompliance.

To satisfy the monitoring requirements of the IRS, the state monitoring procedures essentially must have all elements specified in the regulations:

* recordkeeping and record retention provisions,

* certification and review provisions,

* an auditing provision, and

* provisions for notifying owners and the IRS of noncompliance or lack of certification.

Recordkeeping provisions

The proposed regulations provide that the owner of a low-income project must keep records for each building in the project. These records must show the following information:

* The total number of residential rental units in the building.

* The percentage of low-income units in the building.

* The rent charged on each residential rental unit in the building.

* The low-income unit vacancies in the building and rentals of the next available units.

* The low-income certification of each such resident and documentation.

* The character and use of the nonresidential portion of the building included in the building's eligible basis under Section 42.

The proposed regulations require that these records be maintained for a minimum of six years beyond the end of the compliance period for the building.

Certification provisions

Under these proposed regulations, the owner of a low-income housing project would be required, at least annually, to certify to the state agency under penalty of perjury that the project meets the requirements of the applicable minimum set-aside test under Section 42(g)(1).

(The set-aside test requires either that 20 percent of the units be rent restricted and occupied by residents whose gross income is 50 percent or less of the area median, or that 40 percent of the units be reserved for those with incomes 60 percent or less of the area median.)

The proposed regulations also require that the owner certify the following:

* The owner has received an annual low-income certification from each low-income tenant and documentation to support that certification.

* Each low-income unit is rent restricted under Section 42(g)(2). (A residential unit is rent restricted only if the gross rent does not exceed 30 percent of the income limitation chosen.)

* All units in the project are for use by the general public and are used on a nontransient basis.

* Each building in the project is suitable for occupancy, taking into account local health, safety, and building codes.

* There has been no change in any building's eligible basis.

* All tenant facilities included in the eligible basis of any building in the project are provided on a comparable basis, without a separate fee, to all tenants in the building.

* If a low-income unit in the project becomes vacant during the year, reasonable attempts are made to rent that unit to tenants having a qualifying income. While the unit is vacant, no units of a comparable or smaller size are rented to tenants not qualifying.

* If the tenants' income in low-income units increases above the limit allowed, the next available unit of comparable or smaller size will be rented to tenants having a qualifying income.

Periodic certifications for a building must be required at least to the end of the building's 15-year compliance period.

Review provisions

The proposed regulations provide that the state agency will review, in at least one of two ways, certain records kept by owners of low-income housing projects. Specifically, the monitoring procedure must require the following:

* Each year, the owner of a low-income housing project must send to the state agency a copy of the annual low-income certification from each low-income tenant and a copy of the documentation to support that certification.

* The state agency must inspect a reasonable number of low-income housing projects each year. The inspection must include, at a minimum, an on-site review of the tenants' low-income certifications for that year and the documentation the owner has received to support those certifications.

If an agency chooses to include the second of these review procedures in its monitoring procedure, then the low-income housing projects to be inspected must be chosen in a manner that will not give owners advance notice that their records for a particular year will or will not be inspected. However, an agency may give an owner reasonable notice that an inspection will occur so that the owner may assemble the records.

The proposed regulations provide that the monitoring procedure may exempt from the certification and review provisions certain buildings that are administered under monitoring programs other than that required under Section 42(m)(1)(B)(iii). These are buildings financed by the Farmers Home Administration (FmHA) under its Section 515 program and buildings of which 50 percent or more of the aggregate basis (taking into account the building and the land) is financed with tax-exempt bonds.

However, the monitoring procedure must require the following:

* The owner of any exempted building must certify to the state agency at least annually under penalty of perjury that the building complies with the requirements for FmHA assistance or tax-exempt bond financing, as applicable.

* The minimum set-aside, income, rent, and suitability-for-occupancy requirements must have also been met.


The proposed regulations provide that the state agency must have the right to perform an audit of any low-income housing project at least through the end of the building's compliance period. An audit includes an inspection of the building as well as a review of the records described in the recordkeeping portion of the regulations.

The auditing provision is required in addition to the review of the low-income certification and documentation.


Under the proposed regulations, a monitoring procedure must provide that the state agency send written notification to the owner of a low-income housing project as soon as possible if the agency does not receive the required certification or if the agency discovers on audit, inspection, or review, or in some other manner, that the project is not in compliance with Section 42.

The monitoring procedure must provide that the owner has an opportunity to supply a missing certification or to correct noncompliance within a period specified in the procedure.

The correction period is not to be more than 90 days from the date of the notice to the owner. However, a state agency may provide up to a six-month extension only if the extension is based on a determination by the agency that there is good cause for granting it.

The proposed regulations provide that a monitoring procedure must require the state agency to notify the IRS on Form 8823 of an owner's noncompliance or failure to certify no later than 45 days after the allowed time for correction, whether or not the noncompliance or failure to certify is corrected.

If a building goes totally out of compliance with Section 42, the state agency is not required to file Form 8823 in every subsequent year to report the noncompliance. Instead, the agency may file a single Form 8823 for the building when the agency becomes aware that the building has gone entirely out of compliance. However, the agency must report on that form that the building is entirely out of compliance and will not be in compliance in the future.

These proposed regulations permit a state agency to delegate all of its compliance-monitoring responsibilities, except for the responsibility to file Form 8823, to an outside private contractor or an agent. The agent or outside contractor must notify the agency of any noncompliance or failure to certify. The agency must then notify the IRS of the noncompliance no longer than 45 days after the end of the correction period.

An agency must use reasonable diligence to ensure that compliance monitoring is properly performed. Delegation of monitoring responsibilities does not relieve the state agency of its obligation to notify the IRS of any noncompliance of which it becomes aware.

Property managers of LIHC projects should be aware of these procedures. Noncompliance can result in the state housing authority reporting the project to the IRS. Further noncompliance could result in recapture of the tax credit.

Michael J. Novogradac is a partner with the California-based public accounting firm Novogradac, Fortenbach & Co.
COPYRIGHT 1993 National Association of Realtors
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Tax Issues
Author:Novogradac, Michael J.
Publication:Journal of Property Management
Date:Jul 1, 1993
Previous Article:Implementing a computerized maintenance program.
Next Article:Property management: an industry in conflict with its clients.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters