The Internal Revenue Service (IRS) has released the long-awaited Final and Temporary Regulations on the Average Income Test Minimum Set-Aside for Low-Income Housing Tax Credit (LIHTC) properties. The announcement came on Friday, October 7, 2022, and will be published in the Federal Register on Wednesday, October 12, 2022. Industry leaders are pleased to see that the new guidance clarifies and corrects much of the language found in the October 30, 2020, Proposed Rule.
The Average Income Test was added as a Minimum Set-Aside option under the Consolidated Appropriations Act of 2018. The structure of this option allows for populations previously unserved by the LIHTC program to benefit from affordable housing opportunities by expanding the income limit potential up to 80 percent Area Median Income (AMI). Additionally, owners who opt to elect this Minimum Set-Aside, must balance those units at higher income and rent designations with others at lower – as low as 20 percent AMI. As a result, the average of all LIHTC unit designations must be at or below 60 percent AMI. This allows for more income-diverse populations to be served in the same LIHTC communities and is a step toward preserving housing opportunities for in-place residents at the time of acquisition by a new owner.
In October 2020, the IRS issued a Notice of Proposed Rulemaking regarding the Average Income Test which resulted in many questions, comments, and calls for changes from stakeholders within the industry. The IRS has carefully considered the feedback received over the past two years and the new guidance received this week is in keeping with recommendations made and supported by affordable housing groups nationwide. Most notably, the new guidance establishes:
- The Average Income Minimum Set-Aside is considered met as long as 40 percent of the units in the property have imputed income limitation designations that average 60 percent or less of AMI and the households living in those units meet the income designation for their respective units.
- All units that comprise a property’s Applicable Fraction must also average 60 percent or less of AMI. If a household in one of these units fails to meet eligibility requirements and must be removed from the Applicable fraction, resulting in an average that is above 60 percent of AMI, this is not deemed a violation of the Minimum Set-Aside. Rather, an additional unit may be removed from the Applicable Fraction or its imputed income limitation designation reduced to regain the average of 60 percent or less of AMI. While this will result in a reduction in Qualified Basis, it removes the “cliff test” under the 2020 proposed rule.
- Owners must adhere to recordkeeping and reporting requirements set forth by State Housing Finance Agencies and the IRS including identifying the units in the qualified group of units that satisfy the Minimum Set-Aside and the units in the qualified group for purposes of the Applicable Fraction.
- Changes in unit imputed income limitation designations may be made under the following circumstances:
- In accordance with any procedures established by the IRS in the future;
- In accordance with written policies and procedures the Housing Credit agency puts in place;
- To ensure protections under the Americans with Disabilities Act of 1990, the Fair Housing Amendments Act of 1988, the Violence Against Women Act of 1994, the Rehabilitation Act of 1973, or any other state, federal, or local law intended to protect tenants;
- To allow an income-qualified tenant to move to a different unit within the project while keeping the same income limitation; and
- To restore the average of no more than 60 percent of AMI as applied to meet or maintain either the Minimum Set-Aside or the Applicable Fraction.
The October 2022 final regulations apply to taxable years beginning after December 31, 2022.
National Center for Housing Management is hosting a special Breaking News live webinar covering the details of the regulations and how to implement the minimum set-aside. This live presentation will take place on Thursday, October 20, 2022 at 1:00 pm Eastern. Due to the importance of this webinar, we have increased seat capacity for this Breaking News event, but we still anticipate selling out the first live presentation of “Breaking News: LIHTC Average Income Test Updated”. To ensure you get a seat in this first session, please register today.