Ask Eight Questions When Starting to Manage a New Tax Credit Site
When you start managing a tax credit site, you’ll need to get certain information from the owner to manage the site effectively. Getting this information before renting units to qualified low-income households is essential. Without it, you won’t know what’s required to keep your site in compliance—or even to get it to qualify for the tax credit program in the first place.
We’ll tell you what information you need to get from a tax credit owner when you start managing its site. Here are eight key questions to ask the owner to get this information. In case the owner isn’t sure of some of the answers, we’ll also tell you where the information is likely to be found.
1. What Facilities Are Included in Eligible Basis?
“Eligible basis” is a dollar amount that reflects certain tax credit site development costs. This figure helps the state housing agency determine how many credits to allocate. If you don’t maintain the eligible basis, the IRS may recapture some of the owner’s tax credits. Another reason to ask about eligible basis is that if the cost of a facility is included in the site’s eligible basis, you can’t charge residents fees for its use. For instance, if the owner tells you that your site’s swimming pool is included in its eligible basis, you must let residents use the pool at no cost. If the owner isn’t sure what’s included in your site’s eligible basis, ask it to check its tax credit application for the answer.
2. When Will the Owner Begin Claiming Credits?
Knowing when the owner plans to begin claiming credits is important for tax credit management because it determines when your site’s compliance period begins and ends. The year credits were or will be claimed opens the 15-year window during which you must keep your site in compliance. The owner can elect to begin the credit period either in the placed-in-service (PIS) year or in the following year. The owner doesn’t commit to an election until it files IRS Form 8609 (line 10a) along with its tax return for the first year of the compliance period. But the owner should be able to tell you its plans before lease-up.
3. What’s the Minimum Set-Aside for the Building or Site?
Your building or site must maintain a minimum set-aside to be qualified for the tax credit program. To meet the set-aside, you must rent a certain percentage of your units to qualified low-income households.
The minimum set-aside is expressed as two numbers separated by a hyphen (for instance, 20-50 or 40-60). The first number tells the minimum percentage of units you must rent to qualified low-income households. The second number tells the highest income a qualified household can earn, expressed as a percentage of HUD area median gross income (AMGI). So if your site’s set-aside is 20-50, you must rent at least 20 percent of your site’s units to households earning no more than 50 percent of AMGI.
Owners must elect the minimum set-aside for their building or site when they file Form 8609 (line 10c). But the owner may already have committed to the set-aside in its tax credit application.
4. Must the Minimum Set-Aside Be Met on a Per-Building or Per-Site Basis?
If you have more than one building at your site, find out whether the owner wants you to meet the set-aside on a per-site or per-building basis. The owner must tell the IRS of its decision on Form 8609 (line 8b).
5. When Is the Deadline for Meeting the Minimum Set-Aside?
For a site to qualify to claim credits, the minimum set-aside must be met by a deadline. If the deadline isn’t met, your site may not qualify to claim credits. For allocations made after 1990, initial compliance has to be met no later than Dec. 31 of the second year.
In other words, the deadline for meeting the set-aside is the last day of the first taxable year the owner claims its tax credits. This is either the placed-in-service year or the following year. The owner must tell the IRS, on Form 8609 (line 10a), when it will begin claiming credits.
6. Is the Site Deep Rent-Skewed?
Deep rent-skewing is an attractive option for sites in cities where market-rate rents are high. If the owner tells you the site will be deep rent-skewed, you’ll need to meet an additional set-aside for all your low-income units. This “deep rent-skewed set-aside” is 15-40, which means you must rent 15 percent of all your low-income units—including any extra units—to households earning no more than 40 percent of AMGI. Owners elect to make their sites deep rent-skewed on Form 8609 (line 10d).
7. What’s the Target Fraction for the Building?
For an owner to be entitled to claim all the tax credits it was allocated for your site, you must rent enough units to low-income households to bring your building’s first-year fraction up to the owner’s target. It’s essential to know the target fraction before you begin renting your units. If you end the year by falling short of the first-year fraction, you jeopardize the owner’s credits. Owners set the target for the first-year fraction with the state housing agency during the development phase of a tax credit site.
8. Have You Made Any Other Promises to the State Housing Agency?
The owner may have promised to comply with additional state housing agency requirements when it applied for credits. For instance, it may have agreed to charge rent at certain levels, meet set-asides for special population groups such as the homeless or the elderly, or provide social services or special amenities such as day care or transportation to medical appointments.
Tell the owner to check both its application for credits and the extended use agreement it signed with your state housing agency to find out what promises it made.