Texas Storm Recovery: How to Take Advantage of LIHTC Disaster Relief
The recent winter storm that battered Texas left many of the state’s residents in dire situations. In the aftermath of the storm, a mass power outage left more than 4 million Texas residents in the dark and cold for days. And as power and heat was restored, the thawing ice exposed broken water pipes in buildings that began to gush water, causing damage and inhabitable living situations. The burst pipes and offline water treatment facilities disrupted water systems serving a majority of the state’s counties. Millions had no running water or were under orders to boil it before use.
The extent of the disaster made President Biden sign a major disaster declaration, enabling the government to provide more aid to Texas. The president’s approval allows the Federal Emergency Management Agency (FEMA) to provide more resources and assistance, including grants for temporary housing and repairs, low-cost loans to cover uninsured property losses, and other programs to help communities recover.
In addition, the major disaster declaration is significant since it makes LIHTC and tax-exempt, bond-financed multifamily rental housing properties in these areas eligible for relief from certain provisions under the Internal Revenue Code (IRC) Sections 42 and 142. IRS Revenue Procedures 2014-49 and 2014-50 provide guidance for owners and housing agencies in the event of a Presidentially Declared Disaster. We’ll explain what they say.
Relief for Carryover Allocation, Placed-in-Service Rules
Revenue Procedure 2014-49 provides relief for carryover allocation and placed-in-service requirements. A site that receives LIHTCs must be “placed in service” or completed and occupied in the year that the allocation is received. But oftentimes state agencies will grant an extension and 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 site 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 an extension is granted, the 10 percent requirement will be deemed satisfied if the site 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 site 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. 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’s not subject to recapture of credits to the extent the loss is restored by reconstruction or replacement within a reasonable restoration period.
The IRS defines casualty loss as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual, such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. 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. Qualified basis is the money spent on the construction of a building that benefits low-income residents.
If a site’s qualified 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, however, the time period specified by the housing agency can’t be any later than two years from the end of the tax year in which the casualty loss occurred. 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 major disaster.
Any affected sites not completely restored by the end of the second calendar year from when the loss occurred will be reported to the IRS on form 8823 under category 11e, “Changes in Eligible Basis.”
Emergency Housing for Displaced Households
Another important provision of Revenue Procedure 2014-49 is emergency housing relief. Owners who are able and wanting to provide emergency housing for displaced households can do so without regard temporarily to the income of those displaced individuals. The IRS defines a displaced individual as one who’s displaced from his or her principal residence as a result of a major disaster and whose principal residence was located in a major disaster area designated as eligible for individual assistance by FEMA.
Owners will need written approval from the allocating agency to house displaced individuals. The written approval specifies the date on which the temporary housing period for the site ends. The temporary housing period can’t exceed 12 months from the end of the month in which the president declared the major disaster. In addition, the rents charged for the low-income units that house displaced households can’t exceed the maximum rent for those units that would apply under the LIHTC program.
Protection is also given to existing LIHTC tenants under the guidance. Existing tenants can’t 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 can’t 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’s 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 doesn’t cause the building to suffer a reduction in qualified basis that would cause recapture or loss of LIHTCs.
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.
Recordkeeping. Under Revenue Procedure 2014-49, owners and managers must maintain records of each displaced individual. For each displaced individual, the records must contain the following items in a statement signed by the displaced individual under penalties of perjury:
- The name of the displaced individual;
- The address of the displaced individual’s principal residence at the time of the major disaster;
- The displaced individual’s Social Security number; and
- A statement that he or she was displaced from his or her principal residence as a result of a major disaster and that his or her principal residence was located in a city, county, or other local jurisdiction that’s covered by the president’s declaration of a major disaster and that’s designated as eligible for individual assistance by FEMA because of the major disaster.
In addition, the owner must maintain a record of both of the allocating agency’s approval of the site’s use for displaced individuals and of the approved temporary housing period. The owner must report to the agency at the end of the temporary housing period a list of the names of the displaced individuals and the dates the displaced individuals began occupancy. The owner must also provide any dates displaced individuals ceased occupancy and, if applicable, the date each unit occupied by a displaced individual becomes occupied by a subsequent tenant. The owner must maintain all these records as part of the annual compliance monitoring process.