IRS Extends LIHTC Deadlines, COVID-Related Relief
On Jan. 15, the IRS issued Notice 2021-12, which extends the temporary relief for qualified LIHTC sites from COVID-related difficulties. The notice also extends certain deadlines that were established in prior notices.
These extensions apply to you if you’ve had to deal with delays in LIHTC site construction due to the pandemic. These delays may have made it difficult to stay on schedule with originally planned construction and placed-in-service schedules. Also, state housing agencies have been limited in their ability to conduct compliance monitoring and inspections of LIHTC sites.
We’ll go over the deadline extensions and the relief from certain compliance requirements provided in this guidance.
Deadlines Extended to Sept. 30, 2021
The current notice defines or bookends an extension period of 18 months from April 1, 2020, to Sept. 30, 2021. IRS Notice 2020-53, issued in July last year, had delayed several deadlines until Dec. 31, 2020. The following are the deadline events that have been extended to Sept. 30, 2021:
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.
Any deadlines for the 10 percent requirement that would’ve been within the extension period will be deemed satisfied if the site owner incurs more than 10 percent of the reasonably expected basis no later than Sept. 30, 2021.
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 rehab expenditures incurred during any 24-month period must meet certain expenditure value criteria. With the current notice, the last day for an owner to incur the minimum rehab expenditures with respect to a substantially rehabbed building is postponed to Sept. 30, 2021.
Income recertifications. Owners of mixed-use or mixed-income LIHTC sites don’t need to perform income recertifications during the extension period. But they must resume doing so after the deadline expires for recertifications as they become due. This provision applies only to mixed-use or mixed-income sites, where recertifications are required on an annual basis. Since 2008, with the passage of the Housing and Economic Recovery Act, the annual income recertification requirement has been eliminated for sites with 100 percent buildings or buildings with low-income housing tax credit units and no market-rate units.
Compliance monitoring. State housing agencies are not required to conduct compliance monitoring inspection or reviews during the extension period. According to the notice, the agencies must resume compliance-monitoring inspections or reviews as due after the deadline expires.
Common areas and amenities. IRC Section 42(d)(4)(B) indicates that common areas may be included in eligible basis, or credits may be claimed on the cost of the common areas, as long as the common area is provided as “comparable amenities to all residential rental units.” Also, Treasury Regulation 1.42-5(c)(VII) requires that owners certify annually that “there was no change in the eligible basis (as defined in Section 42(d)) of any building in the project, or if there was a change.”
With the current notice, an amenity or common area being temporarily unavailable or closed due to the pandemic and not for other noncompliance reasons during the extension period does not result in a reduction of eligible basis.
Emergency housing. If individuals are medical personnel or other essential workers, as defined by state or local governments, that provide services during the COVID-19 pandemic, then, for purposes of providing emergency housing from April 1, 2020, to Sept. 30, 2021, under Revenue Procedure 2014-49 or 2014-50, these individuals qualify as “displaced individuals” during the extension period. The rules allow for the temporary housing of these individuals if they’ve been displaced from their principal residences due to the pandemic for emergency purposes, without regard to income qualification and without regard to the usual transience rules and minimum length of occupancy requirement.
Owners must meet certain occupancy requirements in the first year of the site’s compliance period. For an owner to be entitled to claim all the tax credits it was allocated for its buildings, the owner must rent enough units to low-income households to bring each building’s first-year fraction up to the “target fraction.” The target fraction is expressed as the percentage of space in a building that you must rent to qualified low-income households to ensure that the owner can claim all its credits.
If your first-year fraction falls short of the target, the tax credit law gives owners a chance to make up for this shortfall if they rent more units to qualified low-income households after the first year. But if an owner is entitled to claim additional credits because of an increase in the target fraction after the first year, it can claim only two thirds of these credits during each year of the 15-year compliance period rather than the usual 100 percent over the 10-year credit period.
In other words, for units occupied by eligible residents in the first year, the owner may take 1/10th of the total tax credit for the unit each year of the 10-year tax credit period. For a unit first occupied by an eligible household after the first year of the credit period, the owner may take 1/15th of the total tax credit for the unit each year of the 15-year compliance period beginning with the first year an eligible household occupies the unit.
According to Notice 2021-12, “For purposes of §42(f), if the close of the first year of the credit period with respect to a building is between April 1, 2020, and June 30, 2021, then the qualified basis for the building for the first year of the credit period is calculated by taking into account any increase in the number of low-income units by the close of the 6-month period following the close of that first year.”
This language allows a site that’s not fully leased up at year-end to avoid 15-year credits on units leased in the following six months. In order to qualify for this relief, the close of the first year of the credit period must occur between April 1, 2020, and June 30, 2021. This additional six months could make a difference in an owner’s decision of when to start the LIHTC period.
Placed-in-Service Deadline Extended
Placing a building in service means making it functional within the tax credit program. In practical terms, this means if all units are occupied by qualified households, the owner will be entitled to claim the credits it was allocated for the building (after the building is in service for a full calendar month); leasing up units will have already begun and move-ins can start; and your state housing agency will start monitoring your site for compliance with the tax credit law.
According to the notice, “if the deadline for a low-income building to be placed in service is the close of calendar year 2020, the last day is postponed to Dec. 31, 2021.”
Restoring Casualty Losses
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.
If a building’s reasonable period to restore a casualty loss ends on or after April 1, 2020, Notice 2021-12 extends the period to one year from the original end date, but not beyond Dec. 31, 2021. However, your state housing agency may require a shorter extension or not permit one at all.