Know When and How to Use the HUD Handbook at a Tax Credit Site
To calculate household income at tax credit sites, you’re required to follow the rules set out in HUD Handbook 4350.3 (Occupancy Requirements of Subsidized Multifamily Housing Programs). But because the Handbook was written for assisted sites, applying it to a tax credit site can be a challenge. The tax credit law doesn’t say which rules apply, and it’s not always clear how to follow them. The Handbook also uses certain terms that don’t make as much sense in the tax credit context as they do in the assisted housing context.
If you follow the wrong rules or get confused about how the rules apply, you could make serious certification and recertification mistakes that could cost the owner its tax credits.
Follow Six Tips for Using Handbook
To help you, we’ve come up with six tips for using the HUD Handbook at a tax credit site you manage:
Tip #1: When you read “family,” think “household.” The HUD Handbook uses the term “family” and “family members” when describing low-income households. But don’t think that means that members of a low-income household must be related, says tax credit consultant A.J. Johnson. So when you read a Handbook rule that applies to families or family members, realize that it applies to the members of your low-income households regardless of whether they’re related, says Johnson. When you read the terms family and family members, just think “household” and “household members,” instead.
Tip #2: Follow only relevant chapters. Although the Handbook contains nine chapters, all you need to familiarize yourself with are parts of Chapters 2, 3, and 5—those parts that deal with keeping units open to the general public and calculating and verifying household income.
> Chapter 2 (Civil Rights and Nondiscrimination Requirements). The tax credit rules make clear that if any units at your site aren’t “for use by the general public,” those units aren’t eligible for tax credits. To comply, your units must be “rented in a manner consistent with housing policy governing non-discrimination, as evidenced by…the HUD Handbook.” You can find this policy in Chapter 2 of the Handbook, says Johnson.
Section 1 of this chapter gives an overview of key civil rights laws—such as the Age Discrimination Act of 1975—that might apply to your tax credit site. Section 2 outlines the Fair Housing Act’s (FHA) nondiscrimination requirements. Section 3 says what you must do to make your site accessible under both the FHA and Section 504 of the Rehabilitation Act of 1973. Section 504 applies to tax credit sites only if they get federal funding, which means that much of the material in Section 3 of this chapter might not apply to your site. Finally, Section 4 states your responsibilities if you get a discrimination complaint and alerts you to HUD’s right to conduct compliance reviews.
> Chapter 3 (Eligibility for Assistance and Occupancy). You must follow Paragraph 3-6(E) (Income Limits and Family Size), which details who must be counted as members of your low-income households. You must also follow the requirement that all adult household members sign forms authorizing you to verify their incomes [Handbook 4350.3, par. 3-11(A)(2)]. The rest of this chapter doesn’t apply to tax credit sites.
> Chapter 5 (Determining Income and Calculating Rent). Sections 1 and 3 of this chapter set out the rules you must follow for calculating and verifying income. But you should ignore the references to allowable deductions that appear in these sections. You must also consult Appendix 3 (Acceptable Forms of Verification), and Exhibits 5-1 (Income Inclusions and Exclusions) and 5-2 (Assets).
Ignore Sections 2 and 4 of this chapter. Section 2 doesn’t apply because it concerns adjusted income, which doesn’t come into play when calculating household income at tax credit sites. Section 4 gives rent calculation rules that don’t apply to tax credit sites. Although you must charge low-income households at your tax credit site restricted rents, the tax credit program has its own rules you must follow for determining the correct rent.
Tip #3: Don’t assume you must follow other parts of the Handbook—even if they seem relevant. The tax credit law requires you to use only those Handbook rules regarding income calculations and verifications. You’re not required to use the rest of the Handbook, even if its rules seem relevant. For instance, you don’t need to follow the rules in Chapter 4 regarding managing your waiting list or creating an affirmative Fair Housing marketing plan.
Tip #4: Get state housing agency clarification on confusing rules. Contact your state housing agency if you’re confused about how to follow a Handbook rule or if you’re not sure whether a rule even applies to your households, recommends Johnson. State housing agencies are responsible for monitoring compliance with the tax credit program and enforcing its requirements (including the applicable Handbook rules). So your agency should be able to help you understand what’s required.
Tip #5: Ask state housing agency about conflicts between handbook and agency rules. State housing agencies often include income calculation rules in their own compliance manuals or qualified allocation plans. These rules may conflict with the Handbook’s rules.
If a state housing agency has a rule that directly conflicts with what a Handbook rule says to do, follow the Handbook rule, says Johnson. State housing agencies don’t have the authority to make their own rules that conflict with the tax credit program’s requirements, he explains. If you discover that it’s impossible to comply with an agency rule and a Handbook rule, ask your agency about this conflict. If your agency insists on your following its rule, despite the conflict, talk to a tax credit consultant on how to proceed, recommends Johnson. Because the tax credit law binds the agency to follow the Handbook for income calculations, the agency must ultimately change its rule to conform, he explains.
However, follow the state housing agency rule if it’s more restrictive or intended to fill in gaps. State housing agencies can make rules that are more restrictive than the Handbook’s rules—so long as those rules don’t conflict with the Handbook, explains Johnson.
Example: The Handbook says that when pay stubs are used to verify employment income, the applicant or resident must supply “the most recent four to six weeks of pay stubs to illustrate variation in hours worked” [Handbook 4350.3, par. 5-13(C)(3)(b)]. Your state housing agency could insist on six weeks’ worth or even more, says Johnson. But if your agency says applicants and residents need supply only the most recent three weeks of pay stubs, this rule would conflict with the Handbook’s rule. So you would need to follow the Handbook rule instead.
Tip #6: Don’t disregard parts of income rules because you think they apply only to assisted sites. Follow all applicable Handbook rules in full, says Johnson. If you’ve managed assisted sites, you might be tempted to ignore parts of Handbook rules on calculating income that appear to lose their relevance when applied to tax credit sites. But the tax credit law requires the use of the Handbook for calculating income, and it doesn’t exempt any parts that don’t seem to make much sense outside the assisted housing context.
For example, the Handbook says to count up to $480 of earned income from full-time students who are 18 years old or older and who aren’t the head, co-head, or spouse [Handbook 4350.3, par. 5-6(A)(3)(d)]. This cap exists because households at assisted sites get a “dependent deduction” in the amount of $480. You might reasonably argue that because the $480 deduction isn’t part of the equation for calculating income at tax credit sites, the $480 cap should be ignored. But Congress didn’t exempt such rules, so you must comply with the $480 cap to certify and recertify your households correctly.
A.J. Johnson: President, A.J. Johnson Consulting Services, Inc., 813 Chatsworth Dr., Newport News, VA 23601; www.ajjcs.net.