Avoid Three False Assumptions When Renting to Section 8 Prospects
Many managers assume that applicants with Section 8 vouchers are automatically eligible for tax credit housing. Unfortunately, this is not always the case. Households that are eligible for Section 8 assistance may not be eligible for tax credit housing. Or, if eligible, they may not be able to afford your rent. And household income information from the local public housing authority (PHA) may not satisfy tax credit certification requirements.
To help you avoid renting to voucher holders who are ineligible, or who are eligible but can't afford to pay your rent, we'll explain vouchers and certificates. We'll also give you a Model Form: Verify Income of Section 8 Recipients, which you can send to the local PHA to help you get accurate information on household income.
According to HUD, the Section 8 voucher programs together help over 1.4 million low-income households in the United States. In the Section 8 program, the local PHA issues Section 8 housing assistance vouchers to eligible low-income households. These households may then use the voucher to help get suitable housing. The voucher or certificate is good for as long as the household can't afford to pay a fair market rent for adequate housing, says tax credit expert Steve Rosenblatt.
The vouchers are “tenant-based,” meaning that the qualifying households may use them in any rental unit where the owner agrees to participate in the program. When an owner agrees to rent to a certificate or voucher holder, the owner enters into an agreement with the PHA. Under the agreement, the PHA promises to make up the difference between the fair market rent, as determined by HUD, and what a certificate or voucher holder is required to pay.
In most cases, the PHA pays the owner the difference between 30 percent of the household's adjusted income and the unit's rent. In other, fewer cases, it will be the difference between 10 percent of gross income or the portion of welfare assistance designated for housing and the contract rent, which must not exceed the HUD-established fair market rent for the area. In exchange for the PHA payments, the owner agrees to use a HUD lease and to comply with HUD regulations, including ensuring that the site meets HUD housing quality standards.
For example, let's say the HUD fair market rent for a two-bedroom unit in your town is $800 a month, and a certificate holder can afford to pay $500 a month. If an owner rents a two-bedroom unit to the certificate holder, he'll collect $500 a month from the household and $300 from the PHA to make up the difference. This is true even if the rent you would normally charge for the unit is more than $800 a month.
EDITOR'S NOTE: Fair market rents (FMRs) are estimates of rental housing costs in local housing markets that HUD prepares using rent survey data to serve as the basis for determining the maximum subsidy levels in the Housing Choice Voucher program. In general, FMRs are set at the 40th percentile rent. In other words, 40 percent of all units surveyed have rents below this amount and 60 percent have rents above it. Adjustments are made to exclude public housing units, newly built units, and substandard units.
In some areas, HUD will raise FMRs from the 40th to the 50th percentile of recent movers. This is done to ensure that families with vouchers have access to at least half of all standard quality rental units in those areas. In these areas, HUD will have determined that difficult market conditions are preventing families from finding affordable units. Areas are considered to have difficult market conditions when fewer than three-fourths of the families issued vouchers succeed in using them to find housing.
Three False Assumptions that Can Hurt You
These are three assumptions tax credit managers make that can lead to improper rentals.
Assumption #1: If the household has a voucher, the household must be eligible for tax credit housing. This is one of the most common and dangerous assumptions a tax credit manager can make. In some cases, households eligible for Section 8 vouchers may have household income above your tax credit housing income limits, says Rosenblatt. For example, some of your tax credit units may have to rent to households at 40 percent of area median gross income (AMGI), but a voucher holder may be at 50 percent of AMGI.
Or a voucher holder whose income met your tax credit income limits when he received his voucher two years ago may now have income that exceeds the limit. Certificate and voucher holders' eligibility for assistance is based on their ability to pay the local fair market rent, a factor that is not considered in determining tax credit eligibility, says Rosenblatt.
Therefore, if you assume a certificate or voucher holder is automatically eligible, you could rent to an over-income household, resulting in an ineligible unit and possible tax credit recapture.
Assumption #2: Voucher holders can afford tax credit rents. Tax credit rents are based on a percentage of the “very low income” income limit on the HUD income table, an amount that may be higher than HUD's fair market rent. And the rent you may charge a voucher holder can be higher than a percentage of the HUD fair market rent only if the household can afford to make up the difference, which is unlikely.
Therefore, if HUD fair market rents are lower than your tax credit rents, a voucher holder may be able to pay you only a portion of the rent you charge. And that's money out of the owner's pocket.
Assumption #3: PHA data automatically satisfy the certification requirement for tax credit sites. This trap is especially easy to fall into, says Rosenblatt, since the IRS's own compliance monitoring procedure says that you may contact the local PHA and ask for a statement declaring that the household's income does not exceed tax credit income limits. The monitoring procedure adds that this statement will satisfy the certification record-keeping requirement. It is no surprise, then, that tax credit managers often ask local PHAs for income information on voucher holders.
Unfortunately, says Rosenblatt, you can't always rely on PHA data for two reasons:
> Data are too old. Certification back-up data for tax credit housing must be dated within 90 days of the effective date of the certification, says Rosenblatt. But PHA data may be too old.
For example, if a household's Section 8 certificate became effective Jan. 1, 2011, and the PHA sends you a copy of that household's income certification with forms HUD 50058 or 50059 on June 1, 2011, the income information on that form may not be used to certify the household for tax credit purposes.
> Vague responses omit needed income information. Another problem is that PHAs won't always give out a household's income certification form. Instead, when asked, PHAs often give vague responses, such as “Yes, Mr. Tenant is in the Section 8 program,” or “Yes, Mr. Tenant's household income is below 50 percent of the area median gross income.”
But to determine eligibility for the tax credit program, tax credit managers need to know precisely what total household income is; rough estimates aren't good enough, says Rosenblatt. Remember, a household eligible for Section 8 vouchers may be above the tax credit income limits and therefore not be eligible for tax credit housing. Therefore, relying on a vague estimate of household income, instead of actual household income, can lead to an ineligible, over-income move-in.
Process Voucher Holders Like Everyone Else
Don't make any of the above assumptions. Instead, the safest approach is to process voucher holders the same way you process any other household. That means checking sources of income and assets, contacting references, and running your credit checks.
If you choose to rely on income information from the local PHA, try to get a copy of the household's income certification form, says Rosenblatt. Check the date to ensure that the form is dated within 90 days of the effective date of your tax credit certification. If the form is dated within 90 days of the effective date of your tax credit certification, you may rely on the household's “annual income” as it appears on the form.
EDITOR'S NOTE: IRS regulations specifically prohibit counting the subsidy you receive from the PHA as income to the household. For example, your rent is $600. A household with a certificate pays $500 in rent, and the PHA sends you a check each month for $100 to make up the difference. Don't count that $100 as a part of the household income.
Send Form to PHA to Get Info
Because most PHAs probably won't give out Form 50058 or 50059, says Rosenblatt, you may be asked to settle for a letter. However, don't accept a letter written by the PHA unless the letter includes the household name, the date of the last income certification, and gross income. You should make it easy for the PHA to give you the information you need by sending a preprinted form they may simply fill out and return. Include a stamped, self-addressed envelope so that the PHA can send it back promptly.
Your form, like our Model Form, should include the following elements:
Household name. The PHA should, of course, accurately identify the household you are certifying so that there's no confusion.
Date of last certification. To determine whether the income information that the PHA provides is within 90 days of your tax credit certification, you will need to know the effective date of the household's most recent certification.
Gross income. Under the Section 8 program, households may deduct certain expenses from their income. These deductions are sometimes called allowances. But tax credit eligibility is based on a household's gross income, with no deduction or adjustments. As a result, make sure to ask for gross income.
Steven L. Rosenblatt: President, Spectrum Seminars Inc., 545 Shore Rd., Cape Elizabeth, ME 04107; www.spectrumseminars.com.
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