Overview of IRS' LIHTC Disaster Relief Provisions
When the President declares a major disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, LIHTC sites are afforded temporary relief from certain requirements of the LIHTC program. As a result of Hurricanes Maria, Irma, and Harvey, major disaster declarations have been made for various counties in Texas, Florida, and Georgia, as well as Puerto Rico and the U.S. Virgin Islands.
Specifically, IRS’ Revenue Procedure 2014-49 details the help that may be provided to displaced households and the operation and development of LIHTC sites from the temporary suspension of certain requirements of Internal Revenue Code 42. Beyond the relief detailed in this revenue procedure, there could be legislation in the near future that affects the allocation of LIHTCs in the areas affected by this year’s hurricanes. The government response to Hurricane Katrina during the Bush administration provides a precedent. Four months after the disaster, President Bush signed H.R. 4440, the Gulf Opportunities Zone Act of 2005. This legislation increased LIHTCs to an amount equal to $18 per capita (based on pre-disaster census data) for the presidentially declared disaster areas for each year from 2006 to 2008, granting Louisiana an extra $1.7 billion, Mississippi an extra $1.06 billion, and Alabama an extra $470 million in LIHTCs. Texas and Florida also received an additional $35 million in total tax credits.
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 property 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 property 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 property 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.
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 is 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–in this case, November 2018. 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.
For buildings in the first year of the credit period, a state housing agency has the discretion to treat the allocation as a returned credit or may toll the beginning of the first year of the credit period. The tolling period may not extend beyond the end of the 25th month following the close of the month of the incident period of the disaster. Owners may not claim any LIHTC during the restoration period of these first-year buildings.
Credits for Rehabilitation Expenditures
An owner may receive an additional amount of credits for rehabilitation expenditures if those expenditures are used for rehabilitation and not for restoring qualified basis. A taxpayer may treat as rehabilitation expenditures any expenditures described in Section 42(e)(2) that exceed the amount expended for restoration. However, if a major disaster causes a reduction in qualified basis, the property owner may alternatively treat as restoration expenditures the amount of the building’s eligible basis immediately before the major disaster, multiplied by the excess, if any, of 1 over the fraction whose numerator is the building’s post-major disaster qualified basis and whose denominator is the building’s pre-major disaster qualified basis.
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 is 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 does not cause the building to suffer a reduction in qualified basis that would cause recapture or loss of LIHTCs. Recently, the Tennessee Housing Development Agency has waived all family income and one-year lease restrictions on vacant apartment units in its LIHTC program for victims of Hurricane Irma who temporarily relocate to Tennessee.
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 project’s LIHTC.
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.