HUD Aims to Revise Income Limit Calculations
Income limit increases will be capped at 10%.
On Jan. 10, HUD published a notice on changes the agency is intending to make to the methodology used for calculating Section 8 income limits. HUD publishes these income limits each year based on changes to each housing area’s median income. In calculating the income limits for each housing area, HUD relies on census data, subject to various rules and adjustments.
For LIHTC site owners and managers, the publication of these limits is important because the income limits determine the maximum rent owners can charge for low-income units. LIHTC sites also use these limits to determine the income eligibility of low-income tenants in accordance with LIHTC requirements. With the latest notice, HUD is clarifying the definition of national median family income for purposes of setting income limits. In addition, HUD intends to establish a national limit or cap on the percentage income limit increase in a given area regardless of the area’s underlying income data.
We’ll discuss the reason LIHTC sites rely on HUD income limits and take a closer look at the changes HUD is making to the income limit calculations. We also cover the impact of the changes to LIHTC sites and households.
Income Limit Basics
Section 42 of the Internal Revenue Code provides that income limits are to be set “in a manner consistent with” how HUD sets limits for Section 8. As a result, the Treasury Department gives the responsibility for setting income limits to HUD. And in first two decades of the LIHTC program, HUD used a complicated formula for setting income limits. At the time, HUD incorporated census data collected every 10 years, Bureau of Labor Statistics (BLS) information, local median income, state median income, and other factors, adjusted by a trending factor.
In 2010, HUD ended its hold-harmless policy for calculating Section 8 income limits. Until then, HUD’s hold-harmless policy was to not allow the income limit for an area to decrease from year to year. This was because lower income limits would decrease rents and financially hurt LIHTC sites. With the 2010 income limits, HUD introduced the concept of floors and caps on income limit changes. From 2010, HUD began limiting all annual income limit decreases to no more than 5 percent and limiting all annual increases to 5 percent or twice the change in national median family income, whichever is greater.
From 2010, HUD added annual American Community Survey (ACS) data with an inflation adjustment to the formula in calculating national median income. However, in 2022, HUD changed the methodology and used only the ACS national median income change from three years earlier, without the inflation adjustment. This change was due to the COVID-19 pandemic and the highest rate of inflation in a generation. At the time, if HUD had used the traditional formula for caps, the cap would have been much higher than the prior year’s cap. Instead, HUD varied the formula for the first time in 12 years and set it at 11.89 percent.
HUD’s Changes to Methodology
HUD’s notice makes two modifications to income limit calculations. When calculating income limits for LIHTC sites, which HUD refers to as multifamily tax subsidy projects (MTSP), HUD applies adjustments to area median income.
The notice says that it will set a ceiling of 10 percent on increases year-to-year. The notice also clarifies the national median income portion of the cap. These changes are intended to more accurately align the adjustments with real income growth trends and control escalating rents in low-income housing areas, particularly those supported by the Low-Income Housing Tax Credit (LIHTC).
National median income. National median income is a key factor in setting income limits. In the notice, HUD stated that going forward, when calculating the HUD national median income component of the cap, it will use the most recent unadjusted estimates of median family income provided by the Census Bureau via the American Community Survey data.
Therefore, for Fiscal Year 2024 income limits, the cap would be based on the change in national median family income from ACS 2021 to ACS 2022. HUD says it will continue to remove inflation adjustments from its cap calculation to keep in line with its purpose of capturing trends in median family income data rather than volatility introduced by accelerating or decelerating inflation. According to industry estimates, this means the cap based on ACS would be nearly 14.8 percent. However, this figure will be limited by the ceiling or cap imposed by the other change implemented by the notice.
Absolute 10 percent cap. For the first time, HUD is implementing an absolute 10 percent cap in income limit increases, making the calculation of the annual cap very predictable. In other words, increases in income limits for any given area won’t be allowed to exceed 10 percent. As a result, for LIHTC sites where rent limits are based on the income limits for the area, the change in LIHTC unit rents in your area would not be allowed to increase more than 10 percent also.
In other words, in years where data shows area incomes grew more than 10 percent, this absolute 10 percent cap will benefit existing households by offering some peace of mind. The household knows that their rents won’t increase by more than 10 percent in any given year. However, the cap could limit the available pool of prospective tenants near the top of the income-qualifying limit since the income limits will be lower than the actual change in the area’s median income.
HUD Seeks Comment on Changes
HUD income levels ultimately determine the maximum rent owners can charge for subsidized low-income housing. That means the caps on 2023 income limits may constrain potential revenue at affected LIHTC sites. Having smaller allowable rent increases can compel LIHTC owners to recalculate budgets, affecting site operations. Amid rising operating costs driven by inflation, rising interest rates, and other factors, many owners were hoping double-digit rent increases.
HUD will release the 2024 income limits on or around April 1. In the meantime, HUD is inviting comments on the changes. The agency primarily seeks to address key questions regarding the effectiveness and impact of the proposed 10 percent cap on annual income limit increases, the accuracy of the national median family income definition, and the overall implications for low-income housing markets. The comment period is open through Feb. 8, and interested persons can submit comments electronically through the Federal eRulemaking Portal at www.regulations.gov.