On Dec. 18, HUD released the 2014 income limits, available at huduser.org. According to Revenue Ruling 94-57, you have 45 days to begin using them to certify and recertify low-income households at your tax credit site. This means this year’s income limits must be implemented no later than January 31, 2014. Here are some site management issues affected by changes in income limits.
How Income Limit Changes Affect Site Management
It's important to keep track of the changes to your area's income limits because you'll use these numbers to certify and recertify low-income households. When HUD releases the numbers, the income limits you'll use are set at a percentage of area median gross income (AMGI), adjusted for household size. The percentage of AMGI your site must use depends on the site owner's agreement with your state tax credit agency.
Beyond certification and recertification, however, the income limits also affect the rent you charge for your low-income units. In addition, they directly affect compliance with the “next available unit rule” and your ability to find qualified applicants to fill your low-income units.
The rent you charge households to occupy low-income units is based on 30 percent of the income limit for the appropriate household size in your site's location. In other words, tax credit rent correlates to income limits rather than to actual household income, as is the case with other housing programs—changes in income limits affect the rents you can charge.
An owner determines a property's current income limits from the Multifamily Tax Subsidy Projects (MTSP) Income Limits chart issued by HUD. The owner multiplies the site's income limits for the imputed household size by 30 percent and divides the result by 12 months to determine a unit's maximum monthly gross rent. When dividing the maximum annual rent by 12, round down to the nearest whole dollar. For a resident responsible for paying some or all of their utilities directly to the utility provider, subtract the approved utility allowance from the monthly gross rent to determine the maximum monthly tenant rent.
For sites placed in service in 1990 and later years, there is a gross rent floor, which means that the rent would not fall below the original gross level, even if income levels decrease. While the new limits must be used for income eligibility, the rent would not drop below original approved levels. Revenue Ruling 94-57 gives the formula for the gross rent floor as either the rent in effect on the date of allocation or the placed in service date.
In addition as a result of the 2008 Housing Economic Recovery Act (HERA), a general hold-harmless rule was established. HERA down not allow the income limit for a project to be less than the project’s income limit “determined” from the previous year. In other words, once your property is placed in service, it is not subject to any decreases in income limits and therefore, neither can rents.
Complying with Next Available Unit Rule
Changes in income limits also affect compliance with the next available unit rule. According to the rule, if a household's income exceeds 140 percent of the current income limit at the time of recertification, the unit can still be counted as a low-income unit provided that the unit remains rent restricted and the next available unit of comparable or smaller size is rented to a qualified low-income household.
Therefore, if limits go down, to safeguard the owner's tax credits, you must be watchful of whether a household's income exceeds 140 percent of the income limits at the time of annual recertification. With lower income limits, it becomes easier for a household's income to exceed the 140 percent ceiling. When this happens, under the rule, you must rent the next available unit of comparable or smaller size in the building to a qualified low-income household in order for the site owner to continue claiming credits for the over-income unit.
Finding Qualified Applicants
Generally, if the income limits for your area drop, it may become more difficult to find applicants whose incomes make them eligible to occupy your low-income units. Still, you'll have only 45 days to begin using these lower limits. In the meantime, you may want to increase your marketing efforts to make sure you'll have a large enough pool of qualified applicants to consider after the switch.
Also, if the income limits in your area have increased, you may want to go back through any files denied over the past few months to see if any slightly over income households may now qualify under the new limits.