Complying with 'Safe Harbor' Rule
As a site owner or manager, you may not be aware that the IRS has a “safe harbor” rule for tax credit sites. The safe harbor rule lets low-income residents qualify for units before the beginning of the first taxable year of a building's tax credit period, says affordable housing expert A.J. Johnson, an expert in IRS rules as applied to tax credit sites.
The IRS developed the safe harbor rule because of the U.S. Department of Treasury's concerns about tax credit site residents whose incomes exceed the limit beginning in the first year of the tax credit period. The concern applied especially to mixed-income sites, where some residents were renting at market rates while others, whose incomes exceeded the applicable limit, were occupying low-income units—a potential violation of the available unit rule.
Accordingly, the IRS issued Procedure 2003-82, outlining the methods by which owners must:
Determine whether over-income residents are occupying any low-income units at the beginning of the first year of the credit period; and
If that is the case, comply with the available unit rule.
How to Comply
Adhering to IRS Procedure 2003-82 is relatively simple, Johnson says. Here's what you need to do:
First, at the time a building is acquired, its current low-income residents may be certified as eligible for their units for up to 120 days after the acquisition date. The income limits in effect at the time of acquisition will be used, and the effective date of the certification is the acquisition date. Residents who move in after the date of acquisition, and residents who move into newly constructed sites, must be qualified on the date of move-in, while income verifications may be dated up to 120 days before the move-in.
Second, if a resident's income exceeds the applicable income limit at the beginning of the first credit year, the unit is still considered low income if:
The income of the household is first tested for purposes of the available unit rule at the beginning of the first credit year; and
The unit has been rent-restricted since the initial qualification date of the resident.
Procedure 2003-82 states that if an owner uses a method consistent with these safe harbors for determining whether a unit is low income at the beginning of the first credit year, the IRS will not flag the site during an audit.
However, if the owner fails to follow this guidance, and the building rents units at market rates, the burden is on the owner to show that there were no over-income residents in low-income units at the beginning of the first year of the tax credit period.
Basically, the IRS is telling owners that low-income residents who are income-qualified before the first credit year should be subjected to a further income test in January of the first credit year. This is especially important for properties with mixed-income buildings.
How Safe Harbor Rule Works
Suppose that in June 2008, an owner acquires a building that contains a unit for which a low-income household qualifies. In June 2009, annual recertification must take place. However, to meet the safe harbor rule, the owner should perform an income test for the household in January 2009, to show compliance with the available unit rule. If the owner remains in compliance, the IRS will consider the unit to be low-income, even if the tested household is over-income.
If the safe harbor procedure is not followed, the owner must find another way to show that every household occupying a low-income unit at the beginning of the first year of the credit period was not over-income (that is, over the 140 percent level) at the time a market-rate unit of comparable or smaller size was rented during that year.
This particular rule need be followed only if a household was qualified more than 120 days prior to the start of the first credit year. The procedure involves confirming with the household that the income certification is still accurate. If the household has additional income, its certification should be updated based on household documentation. And third-party verifications are not required.
A.J. Johnson: A.J. Johnson Consulting Services, Inc., 3521 Frances Berkeley, Williamsburg, VA 23188; (757) 259-9920; email@example.com.