Dealing with the IRS

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The ruling reverses a longstanding Technical Advice Memorandum the IRS issued in 2000.

The U.S. Tax Court recently held that a developer properly included in its “eligible basis,” for purposes of computing the low-income housing tax credit, its financing costs incurred in the construction of its LIHTC site. The financing costs included bond fees regardless of whether or not the bondholders are exempt from federal income tax on the bond interest under Section 103 of the Internal Revenue Code.

A private letter ruling (PLR) is a written response the IRS issues to an owner or taxpayer when the owner asks a question about the tax effects of its acts or transactions. For example, you may not know whether the IRS can give the owner more time to elect the site’s minimum set-aside, or whether the IRS will still consider your site residential if you offer certain nursing or medical services to residents. If you don’t do the right thing, your state housing agency may cite you for noncompliance, putting the owner’s tax credits at risk.

Regardless of how well you run your tax credit site, your state housing agency may cite you for noncompliance with the tax credit law. If that happens, your state housing agency must notify your site’s owner of the violation and report it to the IRS using IRS Form 8823 (Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition).

The Tax Cut and Jobs Act of 2017 passed late last year includes a provision to allow states to designate “Opportunity Zones” in low-income areas. Investors who develop real estate or fund businesses in these zones are eligible for tax breaks. Governors have been working with mayors, county officials, and local leaders over the past few months to submit proposed zones to the U.S. Treasury Department.

HUD posted Change 4 to HUD Handbook 4350.3, REV-1, “Occupancy Requirements of Subsidized Multifamily Housing Programs,” in August 2013. Change 4 was the first formal change to the Handbook since 2009. And every chapter of the Handbook other than Chapter 2 was affected by Change 4. However, only a portion of the changes apply to the compliance requirements of the Low-Income Housing Tax Credit (LIHTC) program.

Like every other tax credit site manager, you may not always be sure of the right way to handle a situation. And the owner may sometimes ask you questions that you can’t answer. For example, you may not know whether the IRS can give the owner more time to elect the site’s minimum set-aside, or whether the IRS will still consider your site residential if you offer certain nursing or medical services to residents. If you don’t do the right thing, your state housing agency may cite you for noncompliance, putting the owner’s tax credits at risk.

The IRS recently issued circular chief counsel advisory (CCA) 2008812023, requiring that tax credits be allocated in accordance with depreciation deductions. The coordinated allocation should occur wherever a partnership agreement provides for special allocations of depreciation that differ from the general allocation of partnership items, says Barry Jacobs, editor of Housing & Development Reporter.

No matter how efficiently you run your tax credit site, your state housing agency may one day cite you for noncompliance with the tax credit law. If that happens, your state housing agency must notify your site's owner of the violation and also report it to the IRS using IRS Form 8823 (Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition).

The IRS is considering an amendment to the Internal Revenue Code (IRC) Section 42 to provide a method for establishing the value of a tax credit site when the owner wants to sell at the close of the 15-year compliance period. With the help of tax credit expert A.J. Johnson, we will explain the IRS proposal and how the new valuation formula would work, if implemented.

Your tax credit site may offer a parking lot or other parking facility where your residents can keep their cars. If you, as a site owner or manager, want to charge residents a parking fee, you must proceed carefully, cautions tax credit consultant Karen A. Graham. Although the tax credit program's requirements don't specifically address parking lot fees, you may trigger noncompliance by charging them, she warns.