Industry Group Asks IRS to Extend LIHTC COVID-19 Relief
The National Council of State Housing Agencies (NCSHA) recently sent the IRS and the Treasury Department a letter urging them to extend the temporary Housing Credit relief provided by IRS Notice 2020-53 and to make other necessary program accommodations in light of the continuing disruption of the COVID-19 pandemic.
IRS Notice 2020-53
In July, in response to the COVID-19 pandemic, the IRS announced it was providing low-income housing tax credit participants temporary relief from key program requirements. The temporary relief package included deadline extensions, income recertification and compliance monitoring waivers, and other program accommodations.
With the notice, the IRS delayed several deadlines until Dec. 31, 2020. These include the following:
10 percent deadline extension. The 10 percent test requirement is found in Internal Revenue Code (IRC) Section 42(h)(1)(E) and (F). A site that receives a credit allocation must be “placed in service” (completed and occupied) in the year that the allocation is received.
But it’s commonplace for state agencies to issue “carryover allocations,” which extend the required placed-in-service date to the end of the second calendar year after the allocation was issued. To qualify for the carryover allocation, a site must incur at least 10 percent of its anticipated costs within the calendar year in which the allocation was received or six months after the date of the carryover.
The 10 percent requirement was deemed satisfied if the site owner incurs more than 10 percent of the reasonably expected basis no later than the expiration of that extension or Dec. 31, 2020.
24-month minimum rehab expenditure period. An LIHTC is allowable for costs associated with the substantial rehabilitation of a building. There are minimum expenditures to qualify, and rehabilitation expenditures incurred during any 24-month period must meet certain expenditure value criteria. With the notice, the last day for an owner to incur the minimum rehabilitation expenditures with respect to a substantially rehabbed building is postponed to Dec. 31, 2020.
Restoration period extension after casualty loss. Owners may have loss of property from a sudden unexpected event such as a fire or hurricane. Under IRS rules, LIHTC recapture can be avoided if the unit or building is returned to good condition within a reasonable period. Good condition means habitable and suitable for occupancy.
However, tax credits are lost while the units or buildings are offline. If your building or unit is offline due to a natural disaster and the government or FEMA declares your area a natural disaster area, then the credit clock stops until you return the units or buildings to good condition. Therefore, you don’t lose any credits—there’s no recapture.
The notice allowed for an extension to Dec. 31 if a building suffered a casualty loss and the reasonable restoration period ended. The same extension applied to LIHTC buildings that suffered a casualty loss due to a prior major disaster.
Set-asides for qualified rental projects. The notice extends to Dec. 31, 2020, the following periods related to qualified residential rental property financed by certain bonds.
- 12-month transition period when bonds to which IRC Section 142(d) applies are used to acquire an existing residential rental project. The last day of a 12-month transition period that ends on or after April 1, 2020, and before Dec. 31, 2020, was postponed to Dec. 31, 2020.
- Two-year rehabilitation expenditure period for bonds. If a bond was used to provide a qualified residential rental project and if the Section 147(d) two-year rehabilitation expenditure period for the bond ends on or after April 1, 2020, and before Dec. 31, 2020, the last day of that period was postponed to Dec. 31, 2020.
In the letter, NCSHA pointed out that COVID-19 cases are still increasing nationally and the pandemic continues to negatively impact construction material supplies, the timing of permitting and local approvals, and the availability of skilled construction workers. In addition, the pandemic continues to limit the ability of managers to interact with residents for regular site operations and restricts the ability of state agencies to complete approvals and compliance monitoring.
As such, the NCSHA asked the IRS to extend the relief provided by Notice 2020-53. Specifically, the letter asks the following:
- Extend the Dec. 31, 2020, deadlines and associated requirements provided by IRS Notice 2020-53 to Sept. 30, 2021, at minimum.
- Extend the waiver of the physical inspection and tenant file review requirements of IRS Regulation 1.42-5 and tenant income recertification requirements provided by IRS Notice 2020-53 to Sept. 30, 2021, at minimum.
- Extend guidance provided by IRS Notice 2020-53 clarifying that the temporary closure of property amenities and common space facilities won’t negatively impact a property’s eligible basis and result in loss of credits through Sept. 30, 2021, at minimum.
In addition to extending relief provided by IRS Notice 2020-53, the letter urges the IRS and Treasury to make the following critical additional accommodations to keep the program operating effectively during the pandemic:
- Provide a 12-month extension of the placed-in-service deadline as required in IRC Section 42(h)(1)(E)(i) for all developments allocated LIHTCs in calendar years 2018–2021.
- Provide a 12-month extension (until Dec. 31, 2021) of the year-end deadline for property restoration for any property that suffers a casualty loss not associated with a major disaster during 2020. The year-end deadline can be a significant challenge under normal circumstances, particularly if a casualty loss occurs late in the calendar year. Construction disruptions and social distancing requirements due to the pandemic further exacerbate this challenge, and can make it impossible to meet the deadline.
- Provide a 12-month extension for all open noncompliance corrective action periods, with state finance agencies having the ability to reinstate deadlines depending on their assessment of the situation. The ability to conduct routine maintenance and complete work orders is affected by social distancing requirements and construction material shortages, while correction of other noncompliance may be hampered by other delays and closures. The ability to provide additional flexibility on the corrective action period is necessary to avoid penalizing otherwise compliant owners for circumstances beyond their control during the pandemic.
- Provide guidance clarifying that LIHTC allocating agencies may conduct telephonic hearings to satisfy qualified allocation plan (QAP) public approval requirements in IRC Section 42(m)(1)(A)(ii) until Sept. 30, 2021, consistent with guidance provided in IRS Revenue Procedure 2020-49 for private activity bonds.