The corporate rate reductions included in the Tax Cuts and Jobs Act decreased the value of the Low-Income Housing Tax Credit (“LIHTC”) projects because a significant portion of an investor’s return is composed of federal income tax losses. In an effort to restore a portion of the lost value, the Consolidated Appropriations Act, 2018 (the “Act”) included two improvements to the LIHTC program that would (1) increase the amount of LIHTC allocations and (2) create a new minimum set aside test that would make the program available to tenants whose income exceeded 60% of adjusted area median gross income (“AMI”). The increase in tenant allowable income permits owners of LIHTC projects to increase rents to support larger debt-service payments to fill capital gaps caused by owner equity contributions.

The amount of the increase in LIHTC allocations is a cumulative annual 12.5% calculation commencing in 2018 and proceeding through 2021. In the absence of an extension of the new allocation authority, 2022 would see the annual amount of available LIHTC allocation revert to the amount available under current law. The income averaging provision is fashioned as a new minimum set-aside test that, if elected by the owner, establishes the maximum unit income at 80% of AMI, provided that the average designated income for the units in each building does not exceed 60% of AMI. Current law measures compliance by a maximum 60% of AMI applied to the tenants in each unit when the 40-60 minimum set-aside is elected. The net result is greater mixed-income housing, consistent with the goals of many housing policy experts.  

The new minimum set aside test will permit projects that struggle to find sufficient tenants that meet lower income requirements to fill their units with qualified tenants at higher income levels so long as the average designated income for each building does not exceed 60% of AMI. The new provision will also provide significant benefits for rehabilitation projects where holdover tenants may not qualify for the 60% AMI test.  

Like many new legislative provisions, the new income averaging provision raises many implementation and compliance questions. Owners who utilize the new provision must designate income limits for each unit and strictly monitor the income so that the average income of qualified units remains below 60% of AMI, at the potential risk of loss of 100% of the allocated LIHTC. Owners who have financed their project with tax-exempt bonds must continue to comply with the tax-exempt bond tenant income requirements, while also meeting the income averaging requirements if they elect the income averaging set-aside. State allocating agencies will likely establish their own, likely more restrictive rules that may narrow the ability of owners to utilize the new provision. Owners should check with their allocating agency to see if the new rules will be available for projects that receive LIHTC allocations in 2018 or in previous years but have not yet received a Form 8609.  

The IRS has not yet provided a timeline for issuing guidance regarding these provisions, however, anticipated guidance, perhaps in the form of an amended Form 8609 with instructions, should clarify implementation of the next available unit rule in connection with income averaging and the consequences of failing to meet the average designated income of 60% of AMI per building. In the interim, taxpayers and state agencies should consider consulting tax counsel to discuss implementing these beneficial changes to the LIHTC program.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

[View source.]