Meet Requirements of Annual Certification to State Housing Agency
As the end of the calendar year nears, your site’s annual certification to your state housing agency is approaching. Under Treasury Regulation Section 1.42-5(c)(1), owners are required to certify to the state agency that allocated the credit at least annually that, for the preceding 12-month period, the site was operated in compliance with Internal Revenue Code (IRC) Section 42 requirements. Most state agencies define “annual period” as the calendar year with due dates for submission.
Many tax credit sites are run by managers acting as agents of the owner. And by the management contract, the agent becomes responsible for submitting the certification. However, for IRC Section 42 purposes, it’s ultimately the owner’s responsibility to make the annual certification to the state housing agency. Treasury Regulation Section 1.42-5(g) explains that “compliance with the requirements of section 42 is the responsibility of the owner of the building for which the credit is allowable.” And the requirements include making the annual certification to the state agency.
Once submitted, the state agencies review the certifications. And the owner is considered to be in noncompliance if the certification is inaccurate, incomplete, or the owner discloses noncompliance with any of the 12 specific requirements listed in the certification.
12 Certification Requirements
Treasury Regulation Section 1.42-5(c)(1) outlines 12 specific requirements that must be addressed in the certification:
- The project met the minimum set-aside as elected by the owner. The owner may have elected to adhere to the 20-50 minimum set-aside test under Section 42(g)(1)(A), the 40-60 test under Section 42(g)(1)(B), or the 25-60 test under Sections 42(g)(4) and 142(d)(6) for New York City. And if applicable to the site, the 15-40 test under Sections 42(g)(4) and 142(d)(4)(B) for “deep rent-skewed” projects;
- There was no change in the applicable fraction of any building in the project, or if there was, the certification includes a description or explanation;
- An annual income certification and documentation to support the certification was received from each low-income tenant. However, note that “recertifications” are not required for 100 percent low-income sites, although the state agency may require them.
- All low-income units were rent restricted under Section 42(g)(2).
- All low-income units were for use by the general public, including the requirement that no finding of discrimination under the Fair Housing Act, 42 U.S.C. 3601-3619, occurred for the project. A finding of discrimination includes an adverse final decision by the Secretary of the Department of Housing and Urban Development (HUD), 24 CFR 180.680; an adverse final decision by a substantially equivalent state or local fair housing agency, 42 U.S.C. 3616a(a)(1); or an adverse judgment from a federal court;
- The buildings and low-income units were suitable for occupancy, taking into account local health, safety, and building codes (or other habitability standards), and the state or local government unit responsible for making local health, safety, or building code inspections did not issue a violation report for any building or low-income unit in the project. If a violation report or notice was issued by the governmental unit, the owner must attach a statement summarizing the violation report or notice or a copy of the violation report or notice to the annual certification submitted to the agency under paragraph (c)(1) of this section. In addition, the owner must state whether the violation has been corrected;
- There was no change in the eligible basis of any building in the project, or an explanation is included with the certification for the change such as a common area has become commercial space, or a fee is now charged for a tenant facility formerly provided without charge;
- Tenant facilities included in the site’s eligible basis such as swimming pools, other recreational facilities, and other parking areas, were provided on a comparable basis without charge to all tenants in the buildings;
- If a low-income unit in the project became vacant during the year, that reasonable attempts were or are being made to rent that unit or the next available unit of comparable or smaller size to tenants having a qualifying income before any units in the project were or will be rented to tenants not having a qualifying income;
- If the income of tenants of a low-income unit in the building increased above the limit allowed, the next available unit of comparable or smaller size in the building was or will be rented to tenants having a qualifying income;
- An extended use commitment was in effect. This commitment is also referred to as the extended use agreement or land use restriction agreement (LURA); and
- All low-income units in the project were used on a nontransient basis, unless an exception such transitional housing for the homeless provided under Section 42(i)(3)(B)(iii) or single-room-occupancy units rented on a month-by-month basis under Section 42(i)(3)(B)(iv) applies.
Findings of Noncompliance
Even though the certification is made to the state agency, failure to complete the annual certification is reportable to the IRS on Form 8823, Low-Income Housing Credit Agencies’ Report of Noncompliance or Building Disposition, line 11d. Some of the common problems reported to the IRS are:
- The certification is incomplete. The owner didn’t certify compliance with a specific IRC Section 42 requirement.
- The certification isn’t signed, which means there is not a “certification.”
- For nonresponsive owners, usually after sending reminders to the owner, the state agency will report that the certification hasn’t been received.
The IRS views the annual certification, even if self-prepared, as credible evidence of compliance with specific IRC Section 42 requirements. If audited, the certification can eliminate significantly detailed analysis of an owner’s records. But in a case in which an owner didn’t make the certification, the owner may be able to show compliance with the 12 requirements with documentation.
The problem is that after-the-fact documentation is often incomplete and lacks credibility. In some cases, it may impossible to provide satisfying evidence of compliance. For example, as part of the annual certifications, owners certify that the project was suitable for occupancy. In the absence of the self-certification, an auditor may ask if the site was inspected by the state agency as part of its compliance monitoring responsibilities, which would provide very credible evidence. But if the state agency didn’t inspect the site, then there would be nothing contemporaneously prepared to show that the project was suitable for occupancy.
A failure to certify raises questions about the owner’s ongoing compliance with the requirements for operating the IRC Section 42 site. As a result, an auditor may be likely to consider expanding the audit to include a more in-depth analysis.