Staying on Top of HERA: A Review of Key Provisions Impacting Compliance

Staying on Top of HERA: A Review of Key Provisions Impacting Compliance

The low-income housing tax credit program has undergone a notable transformation over the past year. The Housing and Economic Recovery Act of 2008 (HERA; P.L. 110-289), which was signed into law on July 30, 2008, contained significant changes that affect compliance for LIHTC sites.

The low-income housing tax credit program has undergone a notable transformation over the past year. The Housing and Economic Recovery Act of 2008 (HERA; P.L. 110-289), which was signed into law on July 30, 2008, contained significant changes that affect compliance for LIHTC sites.

State agencies have been laboring to interpret the new provisions, and have been issuing policy memos to respond to the changes. The Internal Revenue Service (IRS) also has been addressing questions and concerns as they have surfaced. The agency expects to release its revised 8823 Guide in June 2009, which will include updated interpretations and additional guidance, says Grace Robertson, IRS program analyst, LIHC.

On the compliance side, some of the HERA provisions can present difficulties or confusion for site managers and staff who do not know about or do not fully understand just what all of these changes entail.

In this special issue of the Insider, we will review the most significant amendments to the LIHTC program brought about by HERA. We've asked leading tax compliance experts to explain those changes and share their insights to help you and your staff stay up to date and in compliance.

2009 Income Limits

The Department of Housing and Urban Development (HUD) released its income limits and estimated median family incomes for 2009 on March 19, with a number of important changes mandated by HERA. HUD has posted both the 50 percent and 60 percent income limits, as well as HERA special income limits for HUD-impacted area projects on the HUD USER Web site (

Currently, projects placed in service during 2006, 2007, or 2008, and which are located in a nonmetropolitan area within the Gulf Opportunity Zone are able to use the greater of the median gross income standard or the national nonmetropolitan gross income standard. (HERA increased the allocation of low-income housing tax credits to states to expand the amount of affordable housing created for lower-income households in the Gulf Coast.)

Under HERA, income limits used to determine qualification levels and to set maximum rental rates for projects funded with LIHTCs and/or tax-exempt housing bonds are now referred to by HUD as Multifamily Tax Subsidy Projects (MTSPs)—which are calculated and presented separately from the Section 8 income limits. The MTSP data sets are also available on the HUD Web site (

Rural (Nonmetropolitan) Area Income Limits

For 9 percent LIHTC sites located in certain rural areas, HERA changes provide the potential for increased income limits. It's important to be aware of HERA amendments to the definitions and income limits of rural projects when determining whether a project is, indeed, considered to be rural or is affected by its Metropolitan Statistical Area definition.

The Rural Development section of the United States Department of Agriculture's Web site ( has a tool to help tax credit managers determine whether a property is located in an eligible rural area. Users can enter a specific address or click on an area of the interactive map to drill down for further information.

HERA's amendment redefines income limits for rural projects to be based on the greater of the HUD area median gross income (AMGI) or the national nonmetropolitan median income, which is $51,300 for 2009 (a $2,000 increase over 2008). For example, let's say that a tax credit site is located in a rural area of Alabama. The 2009 state nonmetropolitan median income for Alabama is $46,800, compared to the national nonmetropolitan median income of $51,300. In this case, the site manager would use the national income limit since it is greater than the state nonmetropolitan median income. Note that, at times, use of the higher median income will not translate into higher income limits—a peculiar aspect of the comparison.

There are 19 states where the nonmetropolitan median income will be used, since each of these states' AMGI is lower than the national $51,300 floor. These are: Alabama, Arkansas, Arizona, Florida, Georgia, Idaho, Kentucky, Louisiana, Maine, Mississippi, Missouri, New Mexico, Oregon, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, and West Virginia.

Once management agents have determined whether or not their sites qualify as a rural project, and have selected the appropriate income limits for their area, they can then convert those to 60 percent tax credit limits by multiplying the 50 percent limit times 1.2 as per IRS requirements, says tax credit consultant Ruth Theobald Probst.

The rural area income limit rule applies to income determinations made after July 30, 2008. However, Theobald Probst points out, the rule does not apply to HOME rental properties, RD, Section 8 or if any portion of a building is financed by tax-exempt bonds.

Definition of Rural

o As defined in Section 520 of the Housing Act of 1949, an area is considered rural if it:

o Is not part of or associated with an urban area — is a “remote rural” area;

o Has a population not greater than 2,500;

o Has a population between 2,500 and 10,000, if the area is rural in character; or

o Has a population between 10,000 and 20,000, and

— is not contained within a standard metropolitan statistical area; and

— has a lack of mortgage credit for lower and moderate income families as determined by HUD.

HUD ‘Hold Harmless’ for Reduction in AMGI

HERA modifications to the HUD hold harmless policy offers two potential benefits for tax credit properties. The first change applies to all LIHTC properties. It states that, for any project for any year after 2008, AMGI “shall not be less than the AMGI for the same project in the prior year.”

“The good news is that there is now a ‘gross income floor’ against any HUD AMGI reductions for these projects in future years,” explains Theobald Probst. “We should not anticipate that we will be subjected to any decreases in AMGI as we have been in the past.”

The second benefit applies to projects that fall into certain census areas, she says. The “HERA Special” income limit is an additional set of higher income limits for HUD hold harmless impacted projects that had at least one building placed in service prior to December 31, 2008. (Informal guidance from the IRS indicates that projects receiving allocations by the end of 2008 would also be considered eligible.)

This new set of income limits came about because HUD changed the method by which it determines AMGI, which impacted certain projects. “The focus of the ‘HERA Special’ is on these certain projects that could have been affected by this change of method, particularly in 2007 and 2008,” says Theobald Probst. Also, since the HERA Special tracks by MSA, HFMA, or county, any projects that were in service in that area would be considered as “affected” by the census data process changes (either in 2007 or 2008) and are entitled to the “HERA Special.”

Like the rural area income limit modification, tax credit properties impacted by HUD hold harmless policies also have a “greater of” choice when determining AMGI, says Theobald Probst.

The HERA amendment makes the following change in the AMGI determination:

“For HUD hold harmless projects, the determination of AMGI will be the greater of: (a) the amount determined without regard to the special rule for HUD hold harmless impacted projects, or (b) the sum of the AMGI determined under the HUD hold harmless policy, plus any increase in AMGI after 2008.”

HUD has posted on its MTSP Web site ( the counties that may have these HERA special influences.

“The interesting impact of creating this special circumstance for these impacted projects is that some of our now-existing tax credit projects may have potentially higher income limits than future tax credit projects. We are awaiting clarification on this strange impact,” says Theobald Probst.

What Is a Hold Harmless Impacted Project?

A hold harmless impacted project is a project for which the area median gross income limits would have been less (reduced), except for the hold harmless provision, in calendar years 2007 and 2008.

Annual Income Recertification Exception for 100 Percent LIHTC Projects

Certainly one of the biggest changes for tax credit managers is the elimination of the requirement for annual recertifications of household income for residents of 100 percent tax credit projects.

“For most people, this has been a welcome change in that it limits the intrusiveness of income certifications for low-income households, and it also reduces the costs of conducting annual recertifications for owners,” says Robertson.

The rule applies to 100 percent low-income projects, not buildings, as elected by the owner on Form 8609. Tax credit consultant Elizabeth Bramlet explains: “A project is defined on Line 8b of each building's 8609 form. On this line, the owner tells the IRS if they are electing to include the building represented by the form in a multibuilding project. If the owner indicates the building is not part of a multibuilding project, the building is its owner's project and the owner can stop doing annual recertifications if it is a 100 percent LIHTC building. If the owner indicates that the building is included in a multibuilding project, the owner attaches a list of the other buildings in the project. The owner may stop completing annual recertifications if all the buildings listed as part of the project are 100 percent LIHTC buildings.”

The exception, which went into effect on July 31, 2008, only applies for purposes of the Section 42 and 142 income recertification requirements. It does not affect recertifcation requirements for other programs, such as HUD or HOME, and only waives the income recertifcation requirement, not any other eligibility requirements.

While tax credit managers may be eager to embrace this exception, they should not stop completing annual recertifications until they hear from their state agencies about their plans for implementing this provision of the Act, cautions Bramlet. “Some jurisdictions are considering whether to require one annual recertification per resident to double-check the accuracy of the initial certification. Each HFA will inform the owners of 100 percent LIHTC sites in their jurisdiction how and when they can stop doing annual recertifications.” Managers who are preparing to stop doing recertifications should first check for, and fix, any outstanding noncompliance issues, she adds.

So if the IRS no longer requires recertification, why are state agencies reluctant to follow suit?

In her conversations with state agencies, Robertson has uncovered several reasons. “Some states have requirements to report to their state legislatures, some have invested their own funds and want to be sure that the funds are being used wisely, and some just aren't confident that the owners can, on a routine basis, identify low-income families to rent their units to,” she says. “This is a perception that owners will need to address with their state agencies individually and collectively. I've suggested that the states share with the owners the reasons why they are requiring recertifications, whether it's a one-time recertification after the first year of occupancy, or if it's done on a continuing basis.”

She also points out that, like other state-imposed requirements, failure to comply with a state agency's requirement for annual income recertifications in 100 percent LIHTC projects is not a reportable noncompliance event on Form 8823.

Even though they are not completing annual recertifications, the IRS has said that owners still must verify a household's ongoing compliance with the full-time student rule. Check with your state agency for a form to document each resident's continued eligibility under the full-time student rule.

Robertson adds that, while “there is no particular requirement within the rules to do an annual recertification for the student status, the IRS is looking at establishing a separate requirement so that you would be doing the student rule certification every year. We'll try to make that as easy as possible.”

In addition, annual income recertification waivers (Form 8877) are no longer being enforced, Robertson says. “Although, technically, the waivers still exist in Section 42, for all practical purposes, it has been replaced by the exception to the requirement in IRC Section §142(d)(2), and the IRS is no longer accepting submissions.”

Annual Income Recertification Exception under Section §142(d)(2) of the Internal Revenue Code

The determination of whether the income of a resident of a unit in a project exceeds the applicable income limit shall be made at least annually on the basis of the current income of the resident. The preceding sentence shall not apply with respect to any project for any year if, during such year, no residential unit in the project is occupied by a new resident whose income exceeds the applicable income limit.

The new exception is made applicable to Section 42 sites under IRC §42(g)(4).

Available Unit Rules

The annual income recertification exception raises a question for tax credit managers about the implications for the available unit rule. How can you determine when a household is over-income without recertifying it each year?

Robertson explains that, for purposes of the available unit rule only, “the IRS will treat all households documented as initially income-qualified households as actually being income qualified, as long as the owner demonstrates due diligence when completing the initial income certification. Therefore, the owner does not violate the available unit rule when a unit in a 100 percent low-income housing tax credit project is unintentionally rented to a nonqualifying household.”

To ensure that your site does not unintentionally violate the available unit rule, it is important to understand what due diligence encompasses. The IRS's view is that owners must be able to demonstrate ordinary business care and prudence.

“For determining whether an owner uses due diligence, we look to the tenant file documentation,” she says. “Both the accuracy and the timeliness are key attributes of due diligence, as well as reasonable responses to individual fact patterns using your good judgment.

“You can't always anticipate having a rule for every situation, but you should explain in the record what happened. We also look to see what policies and procedures are in place to make sure income certifications are accurately completed in a timely fashion. The key here is to make sure that what really happens on a day-to-day basis follows the written procedures and policies.” (See “Available Unit Rule Compliance,” for more details on how the IRS determines due diligence.)

Robertson adds that one concern is that owners and managers are relying on recertifications to correct mistakes made during the initial eligibility process. “What we are really trying to emphasize is that you need to make every effort to prevent the error in the first place,” she says.

A frequent question for Robertson has been whether a household can transfer between buildings in a 100 percent low-income project. The answer is yes, she says, since the owner does not know which, if any, of the units are over-income, the IRS will allow a household to transfer between low-income buildings within the project without recertification as long as it is in a 100 percent LIHTC project.

Currently, the transfer rule is not included in any IRS guidance, Robertson says, but the agency is working on legal guidance that will include the rule, and it also will be explained in the next version of the 8823 Guide to be released in June 2009.

Available Unit Rule

Under IRC §42(g)(2)(D), if the income of an initially income-qualified household rises above the income limit, the unit is still considered a low-income unit as long as the rent continues to be restricted. If the household's income rises above 140 percent of the income limit (or 170 percent in deep rent-skewed developments), then the unit continues to be considered a low-income unit as long as the next-available unit of comparable size or smaller is rented to an income-qualified household.

Continued Eligibility for Student Who Received Foster Care Assistance

HERA has expanded tax credit student rule exemptions to include students who have been part of the foster care system. These residents and applicants are not considered to be full-time students within the LIHTC program, even if they are attending school full time.

Currently, there are no limitations based on the student's age or the amount of time since an individual was in foster care, says Robertson. “At this time, the IRS hasn't provided any guidance on what that should be. In the absence of that guidance, the state agencies are stepping in. Owners should work closely with their state agencies to ensure that they are in compliance.”

For audit purposes, the IRS is not going to set standards for documenting whether a resident was in foster care. “Whatever type of documentation that proves that the person was in foster care for whatever time period applies would be sufficient,” she says, such as documentation from state or local children's services agencies.

Exclusion of Military Basic Pay

Military personnel will benefit from HERA's provision excluding the basic military housing allowances from the determination of annual income for qualified low-income buildings.

“A qualified building means any building located in a county with a qualified military installation to which the number of military personnel assigned to units based out of the military installation has increased by at least 20 percent between December 31, 2005 and June 1, 2008, or any county adjacent to such a county,” explains Bramlet.

A qualified military institution is defined as any military installation or facility that had at least 1,000 military personnel assigned to it on June 1, 2008. (See “Qualified Military Bases,” for a list of eligible bases.)

Bramlet adds that this change in how to calculate annual income for an applicant or resident does not apply to the Section 8 or public housing programs. This provision is effective for buildings placed in service after July 30, 2008 and before January 1, 2012.

Annual Income Calculations for Deferred Veterans Disability Benefits

Deferred disability income from the Veterans Administration, whether it is received as a lump sum or is paid monthly, is no longer included in annual income calculations for determining LIHTC eligibility. However, regular veterans' disability income is still counted as income (the exclusion is limited to deferred benefits.)

The Act makes this change in how an owner calculates annual income in the Section 8 and public housing programs, says Bramlet. Because the LIHTC program follows the rules for calculating annual income for the project-based Section 8 program, owners in the LIHTC program must incorporate this change into how they calculate annual income, as well.

This provision is effective for income determinations completed after July 30, 2008.

Resident Data Collection

HERA requires each state agency to collect and furnish HUD with resident demographic data on an annual basis. The data is to include race, ethnicity, family composition, age, income, rental assistance, and disability status. (See “Collection of Information on Residents in Tax Credit Projects.”)

“While the bill insists that this should not place an additional burden on the state agencies, there are implied efforts that must be undertaken to accomplish the task,” says Probst.

State agencies are working closely with the National Council of State Housing Agencies (NCSHA) to limit as much as possible the amount of information that they need to collect, adds Robertson.

The NCSHA is also working with HUD to establish a system that states can use to collect the information. “Although this provision is effective immediately, owners are not responsible for providing the information until receiving instructions as to how to supply the data to their HFA,” says Bramlet. “Owners, however, should make plans for how they can collect the required information. It is assumed that most HFAs will incorporate this provision into their existing processes for receiving the owner's annual certification of compliance.”

Tax-Exempt Bonds

The new provision regarding bond regulations conforms the tax-exempt bond rule for students to the student rule exceptions for the tax credit program. Owners of tax-exempt bond properties can apply the tax credit student rule exceptions (see page 6) to all bond-financed properties, whether or not they have low-income housing tax credits.

The multifamily bond program available unit rule also has been modified. The bond available unit rule is applied by property and the LIHTC available unit rule is applied by building. In a bond-financed LIHTC property, the owner applies the LIHTC available unit rule. In a bond-financed property without tax credits, the owner applies the bond available unit rule, explains Bramlet.

Clarification of the General Public Use Rule

HERA's clarification of the general public use rule states that owners may restrict occupancy or preferences that favor residents:

  • With special needs;
  • Who are members of a specified group under a federal program or state program or policy that supports housing for such a specified group; or
  • Who are involved in artistic or literary activities.

However, the housing must continue to comply with federal fair housing laws and HUD requirements.

The provision applies to buildings placed in service before, on, or after July 30, 2008.

Insider Sources

Elizabeth Bramlet: Affordable Housing Consultant, Liz Bramlet Consulting; (800) 784-1009;

Ruth L. Theobald Probst, CPM, HCCP, SHCM: President, TheoPRO Compliance & Consulting, Inc., 21150 W. Capitol Dr., Ste. 3, Pewaukee, WI 53072; (877) 783-1133;

Grace Robertson: IRS Program Analyst, LIHC,

Sidebar #1

Available Unit Rule Compliance

The key to compliance with the available unit rule when an owner unintentionally rents a unit to a non-qualified household is demonstrating to the IRS that “ordinary business care and prudence” were exercised when income-qualifying new residents, according to the Internal Revenue Service's Grace Robertson.

The following are questions that an IRS examiner might ask to determine an owner's due diligence:

  • What oversight does an owner provide a property manager? Is the property manager trained?
  • What written procedures are in place for qualifying households? Who makes sure the procedures are followed? Is there a review process?
  • Does the owner use standardized forms?
  • Does the owner conduct independent internal audits?
  • What happens if noncompliance occurs?
  • Are households monitored for changes in family size?
  • How are the files maintained?

Source: Grace Robertson,

Sidebar #2

Qualified Military Bases

The IRS released, in Notice 2008-9, a list of qualifying military bases that satisfy the 20 percent population increase requirement under §142(d)(2)(B)(iii)(I) for purposes of the exclusion of basic housing allowance payments to military members in determining income under §142(d)(2)(B):

  • Colorado, U.S. Air Force Academy
  • Hawaii, Fort Shafter
  • Kansas, Fort Riley
  • Maryland, Annapolis Naval Station (including U.S. Naval Academy)
  • South Carolina, Fort Jackson
  • Texas, Fort Jackson and Fort Hood
  • Virginia, Dam Neck Training Center Atlantic
  • Washington, Naval Station Bremerton

The IRS states that the list is not meant to be exclusive and any qualified military installation within the parameters of §142(d)(2)(B)(iv), and which satisfies the percentage requirements of §142(d)(2)(B)(iii)(I), would be eligible to receive similar treatment regardless of its failure to be included in this list or in any future updates. The site owner is responsible for documenting that the exception under §142(d)(2)(B)(ii) is applicable.

Sidebar #3

Collection of Information on Residents in Tax Credit Projects

HERA Section 2835(d) adds the following new section (Sec. 36) to the 1937 Act to require state agencies administering LIHTC projects to furnish HUD with information on residents residing in such projects:

GENERAL — Each State agency administering tax credits under Section 42 of the Internal Revenue Code of 1986 (26 U.S.C. 42) shall furnish to the Secretary of Housing and Urban Development, not less than annually, information concerning the race, ethnicity, family composition, age, income, use of rental assistance under section 8(o) of the United States Housing Act of 1937 or other similar assistance, disability status, and monthly rental payments of households residing in each property receiving such credits through such agency. Such State agencies shall, to the extent feasible, collect such information through existing reporting processes and in a manner that minimizes burdens on property owners. In the case of any household that continues to reside in the same dwelling unit, information provided by the household in a previous year may be used if the information is of a category that is not subject to change or if information for the current year is not readily available to the owner of the property.

STANDARDS — The Secretary shall establish standards and definitions for the information collected under subsection (a), provide States with technical assistance in establishing systems to compile and submit such information, and, in coordination with other Federal agencies administering housing programs, establish procedures to minimize duplicative reporting requirements for sites assisted under multiple housing programs.

Sidebar #4

Rules for Full-Time Students

The five IRS exceptions to the full-time student rule remain in effect and are as follows:

1. At least one member of the household receives assistance under Title IV of the Social Security Act (AFDC, TANF).

2. At least one member of the household is currently enrolled in a job training program receiving assistance under the Work Force Investment Act (WIA), (formerly the Job Training Partnership Act), or under another similar federal, state, or local program.

3. The household consists of a single parent(s) with minor children, and both the parent and child(ren) are not dependents of a third party.

4. All members of household are married and have filed or are entitled to file a joint tax return.

5. At least one member of the household has exited the Foster Care system.

Sidebar #5

HUD Seeks Input on LIHTC Resident Data Collection Requirement

The Housing and Economic Recovery Act of 2008 (HERA) requires state agencies administering sites receiving LIHTCs to submit to HUD, not less than annually, certain demographic and economic information on households residing in such sites.

This statute also requires HUD to establish standards and definitions for the information that state housing agencies must submit, and to provide them with technical assistance in establishing systems to compile and submit such information.

A Notice was published in the March 30, 2009, Federal Register whereby HUD is seeking early input from applicable state agencies, and other interested stakeholders, on a methodology or approach to meet this statutory requirement. Interested parties have until May 29, 2009, to provide comments.