IRS Relaxes Key LIHTC Program Requirements
In response to the COVID-19 pandemic, the IRS announced it’s providing low-income housing tax credit participants temporary relief from key program requirements. This is good news for LIHTC developers and owners dealing with delays and management difficulties related to the pandemic.
Many owners have had to deal with delays in LIHTC site construction due to the pandemic, which made it difficult to stay on schedule with originally planned construction and placed-in-service schedules. Other management issues causing concern to owners as a result of the pandemic center around income recertifications for households and compliance monitoring by state housing agencies.
The nature of the pandemic limits the communication with households necessary for a smooth recertification process, and state housing agencies have been limited in their ability to conduct compliance monitoring and inspections of LIHTC sites. In response to these concerns, the IRS published Notice 2020-53, which outlines the temporary relief provided due to the COVID-19 pandemic. We’ll go over the deadline extensions and the relief from certain compliance requirements provided in this guidance.
The IRS has delayed several deadlines until Dec. 31, 2020. The notice extends previously postponed due dates under relief measures from Notice 2020-23, published earlier this year, that were effective until July 15, 2020. The extensions include filings for sites due to meet the 10 percent test in order to obtain a carryover allocation, filings for meeting the 24-month minimum rehabilitation threshold, and filings for projects where the reasonable replacement period for casualty loss was due to expire.
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 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 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 allows for an extension to Dec. 31 if a building suffered a casualty loss and the reasonable restoration period ended. The same extension applies for 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, is postponed to Dec. 31, 2020.
- Two-year rehabilitation expenditure period for bonds. If a bond is 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 is postponed to Dec. 31, 2020.
Annual certifications ensure affordable housing units are occupied by income-eligible households and provide a means to ensure compliance with the Next Available Unit Rule and the Student Rule. You must establish a recertification anniversary date for each household, and you must notify households of their annual recertification responsibilities.
With the recent guidance, owners of mixed-use or mixed-income LIHTC sites don’t need to perform income recertifications from April 1 to the end of this year. But they must resume doing so after the deadline expires for recertifications as they become due.
It’s important to note that 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.
The notice says that state housing agencies aren’t required to conduct compliance monitoring inspections or reviews for the period of April 1, 2020, to Dec. 31, 2020, but they must resume doing so after the deadline expires for inspections or reviews as they become due.
In addition to the suspension of compliance monitoring detailed in the notice, the IRS recently issued a proposed rule amending the sample size obligations for state housing agencies. The changes are discussed in “IRS Reverts to Prior Sample Size Requirement for Physical Inspections,” below. These changes complement the notice and will be welcome news when state housing agencies restart compliance monitoring inspections in early 2021.
Closure of Common Areas or Amenities
When a building’s eligible basis goes down, the credits the owner can claim go down with it. 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.”
In addition, 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.”
This year, it may be the case that you had to temporarily close access to common areas or other amenities previously available to residents due to COVID-19. In this case, the IRS notice says that as long as the closure wasn’t for other noncompliance reasons, then the closures don’t result in a reduction of the site’s eligible basis for purposes of generating tax credits from April 1, 2020, to Dec. 31, 2020.
After this period of time, the common areas should be reopened with access as usual unless otherwise amended.
Emergency Housing for Essential Workers
The notice clarified that medical personnel and other essential workers, as defined by state or local governments, who provide services during the COVID-19 pandemic qualify as displaced persons under IRS guidance issued in 2014. This allows those workers to receive emergency housing and live in LIHTC units from April 1 to Dec. 31, 2020.
President Trump made an emergency declaration on March 13, 2020, in response to COVID-19. As such, Revenue Procedures 2014-49 and 2014-50, which address major disaster declarations and LIHTC, apply. LIHTC owners aren’t required to offer temporary emergency housing, but if they do, they must comply with the rules provided in these revenue procedures. They allow for the temporary housing of such personnel if they have 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.
IRS Reverts to Prior Sample Size Requirement
for Physical Inspections
Last year, the IRS issued final rules that replaced the temporary compliance monitoring regulations under which state housing agencies had been operating since 2016. With the final rule, in some cases, the number of units at a site the housing agencies needed to monitor increased. Recently, on July 1, the IRS issued proposed regulations changing the minimum number of units for property inspection.
The 2019 final rule required housing agencies to inspect at least as many units as specified by project size in the Low Income Housing Credit Minimum Unit Sample Size Reference Chart [§1.42-5(c)(2)(iii)]. Previously, housing agencies had the option of inspecting 20 percent of the units or the minimum sample size. These agencies could satisfy their compliance requirement by inspecting whichever was less.
The recently issued proposed regulations revert back to the old standard of 20 percent or the number of low-income units set forth in the LIHTC Minimum Unit Sample Size Reference Chart, whichever is less. This is likely to reduce the burden on your staff because they may have to coordinate fewer units for physical inspections.
According to the IRS, agencies are allowed to rely on these proposed regulations retroactively to Feb. 29, 2019, the same date the final rule went into effect. This is equivalent to the 2019 final rule regarding physical inspection requirements never having taken effect for those agencies that haven’t made the change to the 2019 regulations. While the 2019 final regulation went into effect upon its publication, it allowed stating housing agencies until the end of 2020 to implement it, and most haven’t yet done so in the hopes that IRS would rescind it.
The 2019 final regulation also reduced from 30 to 15 days the reasonable notice period that Housing Credit agencies may provide to owners before upcoming monitoring visits. The recent proposed rule doesn’t modify the reasonable notice period, which remains at 15 days.