IRS Provides Temporary Relief to Displaced Victims of Recent Hurricanes
The Internal Revenue Service has provided temporary relief from certain requirements of the Internal Revenue Code to allow owners and operators of low-income housing projects located anywhere in the United States and its territories to provide temporary emergency housing to individuals who are displaced by a major disaster from their principal residences, regardless of income.
This special relief, detailed in Revenue Procedure 2014-49 and Revenue Procedure 2014-50, authorizes owners and operators, in conjunction with agencies and issuers, to disregard the income limits, transience rules, and certain other restrictions that normally apply to low-income housing units when providing temporary emergency housing to displaced individuals.
As a result, owners and operators can offer temporary emergency housing to displaced individuals who lived in a county or other local jurisdiction designated for individual assistance by the Federal Emergency Management Agency (FEMA). Currently, this includes parts of Florida, Georgia, North Carolina, South Carolina, and Virginia, though FEMA may add other locations in the future. Upon approval, emergency housing can be provided for up to a year after the close of the month in which the major disaster was declared by the president.
This relief automatically applies as soon as the president declares a major disaster and FEMA designates any locality for individual or public assistance. For that reason, individuals affected by some other recent major disasters may also qualify for emergency housing relief. For a list of recent disasters, see the disaster relief page on IRS.gov.
Although owners and operators of low-income housing projects are allowed to offer temporary housing to qualified disaster victims, they aren’t required to do so. For those who do, special rules apply.
Relief for carryover allocation, placed-in-service requirements. Revenue Procedure 2014-49 provides relief for carryover allocation and placed-in-service requirements. A site that receives a credit allocation must be “placed in service” (completed and occupied) in the year that the allocation is received. However, 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.
If an LIHTC site owner has a carryover allocation for a building located in a major disaster area and the incident period for the major disaster began before the 10 percent deadline in IRC Section 42(h)(1)(E), the allocating agency may grant the owner an extension for meeting the 10 percent requirement. If such an extension is granted, the 10 percent requirement will be deemed satisfied if the site owner incurs more than 10 percent of the reasonably expected basis no later than the expiration of that extension.
If the incident period for a major disaster occurred on or after the date of the carryover allocation, the state housing agency may grant an extension to the two-year placed-in-service period. The IRS will treat the LIHTC site owner as having satisfied the placed-in-service requirement if the owner places the building in service no later than the expiration of that extension.
Depending on the extent of damage in a major disaster area, a state housing agency may make this determination on an individual project basis or determine that all owners or a group of owners in the major disaster area warrant the above relief.
Recapture relief. A recapture, or taking back, of LIHTCs occurs when a project violates requirements of the program. Typical recapture occurs when the project fails to meet the minimum set-aside requirements by the end of each taxable year. This can occur if the project or building fails to meet the requirements in the first, or subsequent, tax credit periods.
Revenue Procedure 2014-49 provides guidance regarding tax credit recapture relief. Under Section 42(j)(4)(E), if a building’s qualified basis is reduced by reason of a casualty loss, it’s not subject to recapture of credits to the extent the loss is restored by reconstruction or replacement within a reasonable restoration period. Qualified basis is the money spent on the construction of a building that benefits low-income residents. And casualty loss is defined as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Property damage is not considered a casualty loss if the damage occurred during normal use, the owner willfully caused the damage or was willfully negligent, or the damage was progressive deterioration such as damage caused by termites.
However, if the basis is reduced because of a major disaster in a declared major disaster area, there is no recapture of credits as well as no loss of credits if the loss is restored by reconstruction or replacement within a reasonable restoration period. The allocating agency will determine the reasonable restoration period in the case of a major disaster that causes a reduction in qualified basis. Under Revenue Procedure 2014-49, the reasonable restoration period must not extend beyond the end of the 25th month following the close of the month of the major disaster incident period declaration. The credit amount allowable during the reasonable restoration period is measured using the building’s qualified basis at the end of the taxable year immediately preceding the first day of the incident period for the major disaster.
Protection for existing tenants. Another important provision of Revenue Procedure 2014-49 is emergency housing relief. Owners who have obtained written approval from the agency to house displaced individuals may do so for a period not longer than 12 months from the end of the month in which the major disaster incident period starts.
Protection is provided to existing LIHTC tenants, who cannot be evicted solely to provide emergency housing relief for a displaced individual. The LIHTC owner has to keep detailed records for the displaced individuals and cannot charge gross rents higher than the maximum LIHTC gross rents for those units. Further, if a displaced individual begins occupancy of a unit at a time that’s within the temporary housing period and the first year of the credit period, then the unit is treated as a low-income unit during the temporary housing period.
The emergency housing of displaced individuals in low-income units during the temporary housing period doesn’t cause the building to suffer a reduction in qualified basis that would cause recapture or loss of LIHTCs.
Certifying displaced tenants. Although displaced tenants will continue to be considered qualified tenants during the 12-month period following the start of the incident period, they will no longer be considered income qualified after this period unless an initial certification is performed. Owners may choose to income certify the temporarily displaced households so that they can remain in the units for longer than 12 months and not jeopardize the site’s tax credits.
Recordkeeping. Under Revenue Procedure 2014-49, owners and managers must maintain records, including the name, address, and Social Security number of each displaced individual, as well as a displacement statement. The statement should say that the household was displaced as a result of the disaster and the household’s principal residence was located in a jurisdiction covered by the presidential declaration and eligible for FEMA Individual Assistance.