So you want to become a tax credit professional? 33 things you need to know.
Congress created this program in 1986 and put the IRS in the role of issuer and regulator. LIHTCs are dollar-for-dollar credits against tax liability for 10 years to any entity that owns the tax credits and complies with regulations. These valuable tax credits can be lost if program regulations are violated.
Tax credits are generally awarded by each state's housing finance agency. This agency sets the criteria for determining who will receive tax credit allocations, although requirements must comply with federal regulations. State agencies are permitted to award a per capita amount, which rose to $1.80 in 2004 and is pegged to inflation. Awards are made to projects that are eligible based on that state's qualified allocation plan (QAP).
Tax credits may also be awarded under the private-activity tax-exempt bond program, again typically administered by and awarded through a state housing finance agency. Projects receiving awards in this way are not eligible for the same dollar amount of credits as those without bond financing. This is because the funds coming from the bond program have interest rates subsidized by the federal government. These below-market interest rates are considered as a federal benefit to the project and therefore reduce the amount of the tax credit award available.
Anyone interested in participating in the LIHTC program needs to understand how it works. The following basic information will help.
1 The rules for the LIHTC program are embodied in Sec. 42 of the Internal Revenue Code and related documents. There have been a number of changes and/or clarifications to the original regulations. These are documented by revenue rulings, revenue procedures, private letter rulings and technical advice memorandums from the IRS.
2 A tax credit property will have a "set-aside" election that indicates the minimum percentage of units that must be rented to households considered eligible for Sec. 42 and also sets the maximum allowable area median gross income (AMGI) for the determination of income and rent restrictions. All tax credit properties are under one of two federal set-asides, known as either the 20/50 or the 40/60 set-aside. An exception to this set-aside is for the five boroughs that comprise New York City, where a 15/40 set-aside is permitted.
3 Under the 20/50 set-aside, at least 20 percent of the units in the project must be designated for households with a maximum income and rent restriction at 50 percent of AMGI. Under the 40/60 set-aside, at least 40 percent of the units must be designated for households with a maximum income and rent restriction at 60 percent of AMGI.
4 A property typically has more low-income units than the minimum number of units required. The total number of low-income units must be applied specifically to each building and is monitored throughout the compliance life of the project. The percentage of low-income units in a building is known as the building's "applicable fraction."
5 If a building does not have 100 percent tax credit units, then this applicable fraction must be monitored on a unit and square-footage basis.
6 The determination of what designates a "building" is mandated by the state housing finance agency, which assigns a "Building Identification Number" (BIN) to each building.
7 The credit period for a building begins in the taxable year that the building is placed in service or may begin the next taxable year. It extends for 10 full taxable years.
8 The federal compliance period is 15 years; most tax credit properties since 1990 have been required to extend their use for at least another 15 years. The compliance period begins in the same year as the credit period.
9 There are income restrictions that limit who is eligible for Sec. 42 housing. These are typically published by each state's housing finance agency, and are determined by county and number of family members. At move-in, a household's income cannot exceed these limits.
10 The rules for determining household income eligibility are set forth in the Department of Housing and Urban Development (HUD) Handbook 4350.3, primarily in Chapter 5.
VERIFICATION OF INCOME, ASSETS
11 Owners and managers must verify data that are disclosed by the household on its application form. All verification forms must be received no more than 90 days prior to the household's move-in, or "effective," date. HUD permits a 30-day extension to the 90-day verification deadline as long as the information is updated correctly. After 120 days, the verification form is no longer valid.
12 All income sources must be third-party verified in accordance with the HUD 4350.3 Handbook. Asset sources may be self-verified in most states as long as the cash value of the assets (as determined in accordance with HUD regulations) is $5,000 or less. If the cash value is greater than $5,000, then HUD requires that full third-party verifications be completed on all assets and that the actual yearly income from the assets be compared to an imputed interest rate of two percent. The greater income demonstrated from this comparison must be included as income to the family for the next 12 months.
13 Verification forms must be in writing, and using correction fluid invalidates the form.
14 Household eligibility must be determined prior to move-in.
15 Families must be recertified at least every 365 days unless the property has received a "recertification waiver." (See No. 16 for details on the recertification waiver.) Recertification paperwork must be completed by the beginning of the new "effective year." For instance, if a household moves into a project on Feb. 1, 2003, the new effective year would begin Feb. 1, 2004, and recertification paperwork must be completed by that time.
16 Only 100 percent tax credit projects may apply for the recertification waiver. The waiver requires, at minimum, proof that all current households are in compliance with regulations. The state housing finance agency issues the "clearance" letter that enables the ownership entity to apply to the IRS for the waiver. Only the IRS waives recertification requirements.
INCREASES IN A FAMILY'S INCOME
17 After move-in, a family's income is permitted to increase, and it is not required to vacate the unit. However, if the family's income increases and exceeds 140 percent of the maximum income limit, a special rule goes into effect. This rule is called the "available unit rule" and is particularly challenging to apply on properties when buildings contain both market-rate and low-income units. While families are not required to vacate a unit as their income increases, this special rule must be applied correctly. This is a building rule.
18 Sec. 42 has rent restrictions that establish the amount of rent that can be charged, based on the set-aside elected for the project. Please note that published rents are considered the "gross," or maximum, rent allowable.
19 If a family is paying any portion of its own utility costs, a "utility allowance" is determined using either the public housing authority rates or the local utility company rates. These allowances must be subtracted from the gross rent so that the family's lease rent plus the utility allowance do not exceed the program's maximum gross rent.
20 Full-time student households are generally not eligible to live in Sec. 42 units. There are only four allowances that permit these "all full-time student" households to occupy a low-income unit:
* A single parent with children as long as the single parent and children are claimed as dependents on the single parent's tax return;
* Persons living in the unit who are married and filing a joint tax return;
* Households receiving assistance under Title IV of the Social Security Act (AFDC or TANF); and
* Persons receiving assistance under the Job Training Partnership Act or a similar program.
If a family unit contains full-time students but is not composed entirely of full-time students, there is no issue with these regulations. However, if a household becomes a full-time student household at any time after move-in, it will be considered an ineligible household unless one of the four exceptions listed above is proven.
21 Unit-transfer rules require that if a family wants to move to a unit that is in a different building, they must be determined to be eligible against the maximum income limits for that building before they can occupy a low-income unit in that building.
22 Tax credit household files are very important. Paperwork must be thorough and must demonstrate the household's eligibility. Simple math errors can cause a family that appears to be qualified to actually be "over income."
23 The first year of a tax credit property's existence is very important. No tax credits can be claimed until a qualified household first occupies a unit. Qualification is determined based on income eligibility, student status and appropriate rent levels.
24 During the initial year of lease-up, tax credits are awarded based on the pace at which units are occupied. This is very important to the owners' ability to claim tax credits in the first year. It is permissible to move a family into a unit on the very last day of the month and have that unit be counted for that month's qualified occupancy percentage.
25 Most tax credit partnerships will guarantee a lease-up performance percentage by the end of the first year. Management agents should know what the guarantee is in order to best assist the owners in achieving their goals. The general partner is held accountable by the limited partner if tax credits are not delivered as promised.
26 It is not permissible to use a household to qualify more than one unit during this first-year initial lease-up process.
27 Copies of first-year records are strongly encouraged. The IRS requires that first-year files be available for audit "for six years beyond the due date with extensions for filing the federal tax return for the last year of the compliance period."
28 The minimum initial lease term for each household must be at least six months. It is acceptable to count the unit as qualified even if the household does not stay in place the full six months. However, the reason the household did not remain in the unit must be documented in the file. It is important that this be the exception and not the rule on a tax credit site. Families must be non-transient, and this six-month minimum term is the safe harbor to validate the non-transient status of the household.
29 State housing finance agencies are required to monitor compliance in both files and units at the rate of 20 percent every three years. New projects must receive this inspection by the end of the second year after the building is placed in service.
30 The physical condition of units is also important. Violations of health, safety and building codes can lead to the loss or recapture of tax credits.
31 State agencies report non-compliance findings to the IRS on Form 8823.
32 Owners and managers are advised to audit files for non-compliance and correct them in a proactive manner.
33 Errors that demonstrate non-compliance with Sec. 42 regulations must be corrected "upon discovery or when they reasonably should have been discovered." This reasonable period is 90 days from the date of discovery unless the state agency imposes a stricter standard.
Knowing these basic standards in no way assures the success of a tax credit development. Newcomers to the industry are advised to seek the assistance of knowledgeable professionals until they have established themselves in at least one successful enterprise.
Reprinted from Affordable Housing Finance magazine. For subscription information, contact Alexander & Edwards Publishing, Inc. (800-989-7255, ext. 320, www.housingfinance.com).
Ruth L. Theobald, CPM, HCCP, (email@example.com, 877-783-1133) is president of TheoPro Compliance & Consulting, Inc., and served as 1995 president of Milwaukee Chapter No. 13. TheoPro is an IREM Affinity Partner and provides Sec. 42 compliance training, file reviews and preapprovals around the country.
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|Publication:||Journal of Property Management|
|Date:||Sep 1, 2004|
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