On February 25, the Internal Revenue Service (IRS) published final and temporary regulations regarding compliance monitoring duties of state and local agencies administering the Low Income Housing Tax Credit (LIHTC) program. The regulations revise and clarify the requirement that housing finance agencies (HFAs) must conduct physical inspections and review certifications that LIHTC-assisted tenants are income eligible. The rule also comments on a variety of issues and is open for comment, hence, the “temporary” nature of the “final” rule.
The LIHTC regulations are at 26 CFR part 1, section 42. LIHTC units must be suitable for occupancy by low income households. The regulations determine suitability for occupancy by taking into account local health, safety, and building codes. If any assisted housing units in a LIHTC project is not suitable for occupancy, the project may become ineligible for continued tax credits, the amount of the tax credit could be reduced, or previously allowed tax credits could be recaptured. A LIHTC-assisted project must have either 20% of the units rent-restricted and occupied by a household with income at or below 50% of the area median income (AMI), or 40% of the units rent-restricted and occupied by a household with income at or below 60% of AMI.
Current regulations require HFAs to:
- Conduct on-site inspections of all LIHTC buildings by the end of the second year following the year the last building in the project is placed into service (the “all-buildings” requirement).
- Inspect at least 20% of a project’s LIHTC-assisted units (the “20% rule”) and review whether LIHTC-assisted residents are income-eligible in these same units (the “same units rule”).
- Conduct on-site inspections and income certifications at least once every three years after the initial inspections.
- Randomly select which LIHTC-assisted units and tenant records to inspect and review (the “random selection rule”).
- Choose units and tenants in a manner that does not give owners advance notice that a unit and tenant records for a particular year will or will not be inspected (the “no notice rule”). However, an HFA may give an owner reasonable notice (30 days) that an inspection or tenant record review will take place so that the owner may notify tenants.
The amended LIHTC regulations require physical inspections of the lesser of 20% of the LIHTC units in a project or the number of LIHTC units set forth in the LIHTC Minimum Unit Sample Size Reference Chart in Revenue Procedure 2016-15, which was issued concurrently with the amended regulations. Both vacant and occupied LIHTC units must be included when using the 20% rule. Revenue Procedure 2016-15 applies the same rule to determine the minimum number of LIHTC units that must undergo the income eligibility review.
The IRS is concerned that the 20% rule might not be appropriate for projects with relatively few LIHTC units because 20% might not produce an accurate estimate of the remaining units’ overall compliance. Consequently, IRS intends to consider eliminating the 20% rule for smaller projects.
The regulations no longer require an HFA to conduct a physical inspection and income eligibility review of the same units. Also, an HFA may choose to conduct physical inspections and income eligibility reviews at different times.
If a LIHTC project has a HUD Real Estate Assessment Center (REAC) physical inspection protocol, Revenue Procedure 2016-15 now allows HFAs to use the HUD REAC protocol to satisfy the required LIHTC physical inspection requirement. HFAs using the REAC protocol will not have to apply the “all buildings” rule. However, using the REAC protocol does not excuse an HFA from reviewing the income eligibility compliance requirements.
The regulations published in the Federal Register on February 25 became effective on that date and will expire on February 22, 2019; however, the text is also treated as a proposed rule open for comment until May 25, 2016.
The final and temporary regulations are at https://www.gpo.gov/fdsys/pkg/FR-2016-02-25/pdf/2016-04005.pdf
The notice of proposed rulemaking is at https://www.gpo.gov/fdsys/pkg/FR-2016-02-25/pdf/2016-04004.pdf
Revenue Procedure 2016-15 is at https://www.irs.gov/pub/irs-drop/rp-16-15.pdf