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Keeping each building’s applicable fraction on target is an essential part of a tax credit manager’s job. The applicable fraction is the percentage of a building’s units rented to low-income households. It comes into play when you calculate the building’s qualified basis, which affects whether the owner can claim all its tax credits. The qualified basis is the eligible basis (which rarely changes but can’t go up) times the applicable fraction (which often goes up or down).
It’s smart management practice to keep your household files up-to-date and complete all the time. Because LIHTC projects will be reviewed for compliance by the state and may be audited by the IRS, complete, well-organized files are very important.
When someone agrees to rent or lease an apartment, he signs a lease or rental agreement outlining the terms of the agreement. It’s a legally binding contract between the tenant and the owner that details the rights and responsibilities of each party. Unlike a typical market-rate apartment, a tax credit site or unit participates in the federal Low Income Housing Tax Credit (LIHTC) program. This means the provisions of Section 42 of the Internal Revenue Code (IRC) are applicable to the lease.
The Consolidated Appropriations Act of 2018 established income averaging as a third minimum set-aside election, and this option happens to be one of the most significant changes to the LIHTC program in recent years. Every tax credit site must meet and maintain a minimum set-aside throughout the 15-year compliance period to qualify for the tax credit program. A minimum set-aside is the federally required minimum level of tax credit units at a site. To meet the set-aside, you must rent a certain percentage of the units in your building or site to qualified low-income households.
When performing the initial certification for a low-income household at your tax credit site, it’s easy to make mistakes. These mistakes can jeopardize the owner’s tax credits if your state housing agency finds them during an audit.
A private letter ruling (PLR) is a written response issued by the IRS to an owner or taxpayer when the owner asks a question about the tax effects of its acts or transactions. The questions posed by site owners usually entail uncertainty about how to handle a situation and the need for guidance on how to avoid the recapture of tax credits. The IRS-issued PLR interprets and applies the law to a specific set of facts, and the owner or manager who requested the PLR can rely on the conclusions expressed in it.
Like many tax credit managers, you may have considered setting house rules aimed specifically at children. Your motive may be concern for children’s safety around specific hazards like swimming pools. Or if you’ve been getting noise complaints from residents or have recently found excessive wear and tear due to children, you may want to impose house rules to rein in children and preserve peace and quiet.
As an owner or manager, it’s important to keep your designated low-income units qualified as such under tax credit rules. Unless a site is deep rent skewed, a LIHTC site must have either 20 percent of the units rent-restricted and occupied by a household with income at or below 50 percent of the area median income (AMI), or 40 percent of the units rent-restricted and occupied by a household with income at or below 60 percent of AMI.
When calculating household income at initial certifications and at annual recertifications, if you have a mixed-income site, you must properly count the household’s assets. But this can be tricky if you’re not familiar with HUD’s rules.
If you’re not sure how to count assets correctly, you might reject an eligible household because you mistakenly believe that its members earn too much income. Or you may incorrectly determine that a household is over-income at its annual recertification, prompting you to follow the next available unit rule unnecessarily.
The applicable fraction is the percentage of rental units in a building that qualify as low-income units. Specifically, under Internal Revenue Code (IRC) §42(c)(1)(B), the applicable fraction is the smaller of the unit fraction or the floor space fraction. IRC §42(c)(1)(C) defines “unit fraction” as a fraction whose numerator is the number of low-income units in the building, and whose denominator is the number of residential rental units in such building.
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