Protecting Credits After Discovering Recertification Changes
At a household's annual recertification, you may discover things that have changed since the prior year. For example, a household's income may have increased, or its members may have become full-time students. Very often, these changes threaten noncompliance and put the owner's credits at risk, unless you take certain actions.
If you don't recognize which changes threaten noncompliance, or if you don't know what action to take after such discovering these changes, the owner could lose some or even all of the tax credits it was allocated, says affordable housing consultant A. J. Johnson. And once your state housing agency discovers the mistake, it could be too late to correct it, he warns.
We will indicate which changes you are likely to discover at a household's recertification that could put the owner's tax credits at risk. And we will tell you what actions you may take in each case to avoid noncompliance and prevent tax credit loss.
Change #1: Household Earns More Income than Prior Year
If you discover that a household earns more income than it did at its last annual recertification, the household might be considered “over-income.” And if you determine that this is the case, you must take action to prevent tax credit loss.
Action to take. First, determine whether a household is considered over-income for eligibility purposes, advises Johnson. A household is over-income if it earns more than 140 percent of the current year's income limits (or 170 percent, in the case of deep rent-skewed units). Accordingly, households earning less than this amount but more than income limits don't threaten the owner's tax credits, Johnson explains.
If you determine that a household is over-income, you are not required to evict or transfer the household. Instead, you must follow the available unit rule to make sure the owner stays entitled to claim credits for the over-income unit, says Johnson. To do this, you must rent the next available unit of comparable or smaller size in the same building to a qualified low-income household, he explains.
Change #2: Household Members Have Different Student Status
You may discover that some or all of a household's members have changed their student status, in which case the household might be an ineligible student household that violates the student rule. Unlike the case with over-income households, you can't follow a rule to keep the owner entitled to claim credits for the unit while the household continues to occupy it, notes Johnson. But if you discover that a household violates the student rule, you must act to prevent your site owner from losing credits, he says.
Action to take. First, determine whether the household violates the student rule. Households violate this rule only if every member is a full-time student, says Johnson. According to the IRS, a “full-time student” is someone who attends a school or other regular educational organization during at least five calendar months of the calendar year in which the owner's taxable year begins, and the organization must consider the student full-time. However, full-time student households don't violate the rule if one of the following four exceptions applies:
1. The household's members are married and eligible to file a joint tax return;
2. The household consists of a single parent with dependent children, and no one else—except the other parent—is claiming the parent and the children as dependents;
3. At least one household member gets assistance through the temporary assistance to needy families (TANF) program; or
4. At least one household member is enrolled in a federal, state, or local job training program.
If you determine at a household's recertification that it violates the student rule, you must do one of the following to protect the owner's tax credits, says Johnson:
Move the household out of the low-income unit, and move it as a new resident to a market-rate unit (ideally, at a higher rent), and re-rent its former unit to a qualified low-income resident as soon as possible;
Let the household stay, but raise its rent to market rate (if you no longer need to count the unit as low-income); or
Refuse to renew the household's lease.
PRACTICAL POINTER: If you discover that a household violates the student rule in the middle of its lease term, it may be difficult for you to take appropriate action. Consult an attorney about adding language to your tax credit lease that lets you do this. To avoid potential loss of tax credits, it's especially important that you replace the student household with a qualified household by the end of the fiscal year.
Change #3: Different Household Composition
You may learn that a household has an extra person living in the unit, compared with those occupants you listed for that unit at the household's last annual recertification. Depending on who the new occupant is, you may need to count him as a household member, says Johnson. If you don't count occupants as household members when you should, you could make certification mistakes that could cost the owner its tax credits, he cautions.
Action to take. First, determine whether HUD Handbook 4350.3 requires you to count the occupant as a household member. Adults and dependents living in the unit generally qualify as household members, with the following exceptions:
Foster children and adults;
Live-in aides [Handbook 4350.3, par. 3-6(E)(3)].
If you must count an occupant as a household member, calculate and verify the new member's income as you do for the household's other members, and add the new member's income to the household's total, says Johnson.
You should take this action as soon as the new member is added to the household. If you did not know of the addition, the certification should be corrected retroactively to demonstrate the effect of the addition at the time of the move-in, Johnson advises. This additional information will be added to the current certification. A new certification is not required, and the household's recertification date does not change, he says.
Also, be sure to switch the income limit you use to reflect the addition of the new member—for instance, use the four-person limit for your area instead of the three-person limit [Handbook 4350.3, par. 3-6(E)(2)].
If the new member has many assets or earns much income, this could cause the household to be over-income, in which case you must fol-low the available unit rule to protect the owner's tax credits, Johnson says.
PRACTICAL POINTER: Even if you determine that you must not count a new occupant as a household member for income purposes, check whether adding the occupant violates state or local occupancy codes, Johnson suggests. If it does, you will violate state or local law if you continue renting that unit (or another unit of comparable size) to the household. In that case, consult your attorney on how to proceed, he recommends.
A.J. Johnson: A.J. Johnson Consulting Services, Inc., 3521 Frances Berkeley, Williamsburg, VA 23188; (757) 259-9920; email@example.com.