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Learning the Basics, Housing Tax Credits “101”

Learning the Basics, Housing Tax Credits “101”. Blackstone Hotel March 5-6, 2009 Susan Pristo Reaman. Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition Introduction.

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Learning the Basics, Housing Tax Credits “101”

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  1. Learning the Basics,Housing Tax Credits “101” Blackstone Hotel March 5-6, 2009 Susan Pristo Reaman

  2. Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition Introduction • State Agencies are responsible for monitoring LIHTC properties for compliance with IRC § 42 throughout 15-year compliance period. • As described in more detail later, the types of compliance State Agencies will be looking for, include: health & safety standards, rent ceilings and income limits, and tenant qualifications. • State Agencies (or their agent or other private contractor hired by the Agency) perform desk audits, inspect housing, and review tenant files. • When noncompliance is identified or there has been disposition of a building (or interest therein), State Agencies must notify IRS using Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition.

  3. Compliance Review Process • State Agency performs a desk audit, conducts a site visit, or reviews the Owner’s tenant’s files and provides the Owner with a summary of its findings. • State Agencies must provide written notification of an event of noncompliance. The correction period may not exceed 90 days (may be extended up to 6 months with State Agency’s permission) during which the Owner must supply any certifications or otherwise bring the project back into compliance. • State Agency determines whether Owner was always in compliance, has corrected the noncompliance, or remains out of compliance. • If the State Agency determines upon audit that the Owner either remedied the noncompliance or remains out of compliance, the State Agency must file the Form 8823 with the IRS.

  4. IRS Process for Reviewing Form 8823 • Upon receipt of Form 8823, IRS sends a Notification Letter to the Owner identifying the type of noncompliance reported on Form 8823. • Notification Letter states that Owner may not include any nonqualified low-income units when computing the LIHTC and that the noncompliance may result in recapture of LIHTC. • Notification Letter instructs Owner to contact the State Agency to resolve the matter. • Forms 8823 are routinely analyzed by IRS and may result in an audit of the Owner’s tax returns.

  5. Categories of Noncompliance • The Form 8823 contains 19 categories of Noncompliance which are as follows: • Household Income Above Limit Upon Initial Occupancy • Household income exceeds 50% or 60%(whichever elected by Owner) of AMGI. • Household income is the anticipated income for the 12-month period following the effective date of certification (i.e., the date the tenant actually moves in). • Household consists of all individuals living in the unit. • Owner Failed to Correctly Complete or Document Tenant’s Annual Income Recertification • Owners must annually recertify tenants. Recertification must be completed within 120 days before the anniversary date of the original tenant income certification. • Exception for 100% LIHTC building for years after July 30, 2008.

  6. Categories of Noncompliance (cont'd) • Violations of the UPCS or Local Inspection Standards • The buildings and low-income units must be suitable for occupancy under the UPCS or local code. • Standard to be used is identified in the QAP. • State Agency must provide written notification to the Owner of health, safety, and fire hazards. • A LIHTC Property is back in compliance on the date of the repair is made. • Owner Failed to Provide Annual Certification or Provided Incomplete or Inaccurate Certification • Owners must annually certify that their projects are in compliance with Section 42 for the preceding 12 months which means that: • Minimum set aside met; no change in applicable fraction; Owner has annually certified each low-income tenant. • Each low-income unit is rent restricted; all units were available for use by the general public; units were suitable for occupancy; no change in eligible basis; all tenant facilities were provided on a comparable basis; extended use commitment was in effect.

  7. Categories of Noncompliance (cont'd) • Changes in Eligible Basis • Conversion of common areas to commercial property. • Charging fees for facilities (i.e., swimming pool) the cost of which was included in eligible basis. • Changes in Applicable Percentage • Prior to July 30, 2008, a building with 70% present value credit financed with a below market federal loan either had to reduce its eligible basis by the amount of the federal subsidy or reduce its applicable percentage to the 30% present value credit. • The new law as enacted The Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289 (2008) (HERA), made several changes: • A below market federal loan does not affect the 70% present value credit for buildings placed in service after July 30, 2008; • The 9% applicable percentage is fixed for newly constructed non tax exempt bond financed buildings placed in service after July 30, 2008 and before December 31, 2013; and

  8. Categories of Noncompliance (cont'd) • Changes in Applicable Percentage (cont’d) • For owners that made irrevocable election under former section 42(b(2)(A)(ii) on or before July 30, 2008 to apply lesser percentage, the 9% applicable percentage floor will apply. Notice 2008-106, 2008-49 IRB. • Project Failed to Meet Minimum Set-Aside Requirement • Minimum set aside is met on a building by building or project basis at the election of the Owner. • Minimum set aside must be met by the end of the first year of the credit period and every year in the 15-year compliance period. • Gross Rent (s) Exceed Tax Credit Limits • Rent may not exceed 30 % of the imputed income limitation based upon the minimum set aside election. • Cost of fees that are a condition of occupancy (not optional) must be included in gross rent: • Miscalculation of utility allowance that may cause rent to exceed limitation, or • Charges above rent limitation are considered noncompliance.

  9. Categories of Noncompliance (cont'd) • Project Not Available to General Public • Project must be available for the General Public Use. • Cannot limit rent to members of a social organization, or for employees of an employer. • Under the HERA, rules have been liberalized for special needs tenants, members of a Federal or State program that supports housing for such a group, or those who are involved in artistic or literary activities. • These new rules are retroactive to the beginning of the original LIHTC date of enactment.

  10. Categories of Noncompliance (cont'd) • Project must conform to the Fair Housing Act (FHA) • State Agencies must file Form 8823 with the IRS when: • the State is notified by HUD or DOJ of a charge by HUD for a violation of the FHA; • a probable cause finding under a substantially equivalent fair housing state law or local ordinance by a substantially equivalent state or local agency; • a lawsuit under the FHA filed by the DOJ, or; • a settlement agreement or consent decree entered into between HUD or DOJ and the owner of the LIHTC property. • State agencies should report potential FHA violations discovered during their compliance monitoring activities to their HUD Regional Offices or other fair housing enforcement agencies, as appropriate. State Agencies should not submit this information to the IRS via Form 8823. • IRS has entered into a Memorandum of Understating with DOJ and HUD outlining their respective roles in enforcing the FHA under the LIHTC program.

  11. Categories of Noncompliance (cont'd) • Low-Income Units Occupied by Nonqualified Full Time Students • A unit occupied by low-income individuals all of whom are full-time students and no one of whom is entitled to file a joint return is not a low-income unit. • Exceptions for: • Students receiving assistance under Title IV of the Social Security Act, or a student enrolled in a job training program receiving assistance under the Job Training Partnership Act or similar law; • Units entirely occupied by full time students if such students are single parents with children all of whom are students and such parents and children are not dependents ( as defined under section 152) of another except the other parent; • Students who are married and file a joint return; or • Students who were previously receiving foster care assistance determined after July 30, 2008.

  12. Categories of Noncompliance (cont’d) • Violations of the Next Available Unit Rule • If a low-income tenant’s income exceeds 140% of the applicable income limitation, noncompliance occurs when a comparable or smaller unit in that building is rented to a nonqualified household. • The date of a noncompliance event is the date a market rate tenant moves into a vacated unit in the over-income tenant’s building or the reservation of the unit to a market rate tenant in the over-income tenant’s building, whichever is earlier. • Violations of the Vacant Unit Rule • If a low-income unit becomes vacant, the Owner must make reasonable attempts to rent that unit or the next available unit of comparable or smaller size to qualifying low-income tenant before any attempts are made to rent to a market rate tenant. • Reasonable attempts is a facts and circumstances tests and may differ depending on project size, location, and different advertising methods accessible to owners and prospective tenants. • The vacant unit rule is applied on a project basis.

  13. Categories of Noncompliance (cont’d) • Owner Failed to Execute and Record Extended Use Agreement • For all buildings allocated tax credits after 1989, owners must enter into an extended use agreement with the State Housing Agency which begins on the first day of the 15-year compliance period and ends the later of the date specified by the State Agency or the date which is 15 years after the close of the 15-year compliance period. • Owners may correct noncompliance by executing a valid extended use agreement within one year after a determination is made that such an agreement is not in effect.

  14. Categories of Noncompliance (cont'd) • Owner Did Not Properly Calculate Utility Allowance • Owners must properly calculate and reduce rents for a utility allowance when the utility is paid by the tenant. • Owner has Failed to Respond to Agency Requests for Monitoring Reviews • Owner is out of compliance when requests for site visitation or tenant files are denied or unreasonably postponed. • Low-Income Units Used on a Transient Basis • Initial lease term of less than 6 months is considered use on a transient basis. • Exception for building exclusively used for Transitional Housing for the Homeless used to transition homeless individuals to independent living within 24 months and which a government agency provides temporary housing supportive services (Stuart B. McKinney Home Assistance Act 42 USC 11302). • SRO units which permit the sharing of kitchen, bathroom and dining facilities are not considered used on a transient basis merely because the leases are month to month.

  15. Categories of Noncompliance (cont'd) • Project No Longer in Compliance nor Participating in LIHTC Program • Building no longer in compliance with program and not participating in LIHTC program. • Qualified Non Profit Failed to Materially Participate • IRC section 42(h)(5) requires that each State set aside 10% of its allocations to projects which a qualified non-profit owns an interest and materially participates in the development and operation of the project. • “Materially participates” defined under IRC section 469 (h)(1) as regular, continuous and substantial participation in the development and operation of the project. • Under IRC Section 42(h)(5)(D) a non-profit may satisfy the ownership and material participation tests through its 100% owned for-profit subsidiary. • Building Disposition • Sale of building on or after July 30, 2008 does not require the posting of a bond to avoid recapture.

  16. References • IRC Section 42 • 1.42-5 of the Income Tax Regulations • Guide for Completing Form 8823 Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition Revised January 2007 • The Housing Assistance Tax Act of 2008 is contained the Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289 (2008) • Notice 2008-106 2008-49 IRB

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