Understanding the Placed-in-Service Dates for LIHTC Sites
Placing a building in service—that is, making it functional within the tax credit program—can be tricky if you’re not sure what’s required and what your options are. And knowing how to place a building in service is important because it affects when your building’s owner can begin claiming its credits.
Here are four tips to follow when placing your building in service. Go over these tips with the owner. That way, you can make sure the owner can claim the tax credits it was allocated for your building.
What Happens When Building Is Placed in Service
When you place a building in service, the building’s inner construction phase is over. Exterior items may still be under construction. For new construction, the placed-in-service (PIS) date is the date the local buildings department issues it a Certificate of Occupancy (C of O). In practical terms, this means three things:
- If all units are occupied by qualified households, the owner will be entitled to claim the credits it was allocated for the building (after the building is in service for a full calendar month);
- Leasing up units will have already begun and move-ins can start; and
- Your state housing agency will start monitoring your site for compliance with the tax credit law.
FOUR TIPS TO FOLLOW
Because placing a building in service is such a crucial decision, you’ll want to be sure that you and the owner fully understand your options and what effect they’ll have. Here are four tips to follow.
Tip #1: Decide When to Begin Credit Period
Tell the owner of your building to decide when to begin the building’s credit period during its development phase, and to let you know its decision. The tax credit law lets the owner choose whether to begin claiming credits for a building during its PIS year or the following year. If the owner makes its decision early, you and your staff will be better prepared to meet your building’s minimum set-aside and establish each building’s first-year fraction on time.
Although owners should decide this issue during the development phase, they don’t have to commit to their decisions until after their building is placed in service and all units are occupied by qualified households, and they complete IRS Form 8609 (line 10a). Should unexpected circumstances arise before an owner completes this form, it can change its decision.
It’s worth mentioning that the “credit period” differs from a site’s “compliance period.” Many site managers confuse the terms. The credit period is the 10-year period during which the owner claims its tax credits. As discussed, it began either the same taxable year the building was placed in service or the following year. The compliance period is the 15-year period during which you must follow the tax credit law to keep your site in compliance. It starts the same year the credit period does, but lasts five years longer. This is because you must maintain compliance for 15 years, even though the owner claims its 15 years’ worth of tax credits over just 10 years.
Because the tax credit period and the compliance period begin at the same time and affect when the owner can claim credits, managers may think that the two are identical. If you make this mistake, you may believe that your compliance obligations end once the owner stops claiming credits. But this isn’t so. You must maintain compliance for an additional five years after the owner stops claiming credits—that is, after the credit period ends. If you don’t, the IRS may take back the credits the owner already claimed but doesn’t deserve.
Tip #2: Meet Minimum Set-Aside Requirements
If you manage a tax credit site that has more than one building, the owner must still meet the site’s minimum set-aside on a project-wide basis. You must place each building in service separately, but the final PIS date is the one on which the last building at your site is placed in service. Your state housing agency will still issue a separate IRS Form 8609 for each building.
A building’s PIS date triggers compliance monitoring and starts the clock for the tax credit law’s recordkeeping requirements. Consequently, if the buildings at your site have different PIS dates, you may have to meet your compliance requirements on a different schedule for each building.
For instance, suppose you have two buildings at your tax credit site. Tax credit law requires that you meet each building’s occupancy goal of reaching 100 percent occupancy by the end of the first year of the credit period for the building. The first year is either the year the building is placed in service or the following year. Therefore, if each building’s PIS date falls in a different year, the deadline for reaching 100 percent occupancy may be different for each building.
Tip #3: Recognize that PIS Date and C of O Date Are the Same
If one or more buildings at your tax credit site will be newly constructed (or undergo substantial rehabilitation), make sure the owner knows that each building’s PIS date will be the date the building’s first unit is ready for occupancy under state or local law. Usually, this is the date the building’s C of O is issued. It’s not the date the building’s construction is finished or the date the first resident moves in.
The owner has some control over deciding the PIS date since it’s the owner that requests an inspection to have a C of O issued for the building. Once the owner gets the C of O, it must send the certificate to your state housing agency as proof that your building was placed in service. The agency will then write the certificate’s issuance date as your building’s PIS date on Part I of Form 8609 (line 5), which it then sends to the IRS.
Tip #4: Claim Acquisition and Rehab Credits in Same Year
If you manage an existing building that has been allocated both acquisition and rehab credits, it will have two PIS dates because the site has two credit allocations. One set of credits finances its acquisition and another finances its rehabilitation.
The PIS date for the acquisition credits is the date of the acquisition. The owner may choose the PIS date for the rehab credits anytime during the owner-elected 24-month period in which rehab expenditures meet program requirements.
Although your building may have two PIS dates, the owner must start claiming both types of credits for the building in the same year. Consequently, the PIS date for the rehab credits will determine the year the owner starts claiming both types of credits.