Tax Credits 101 - AHMA-PSW...• Minimum percentage of a property that the owner has agreed to...

Tax Credits 101Presented by Gianna Richards

What is this program called?• Low Income Housing Tax Credit

• LIHTC

• Tax Credit

• Section 42

What is a Tax Credit?• It is a dollar for dollar reduction of the investor’s tax liability.

• It is not the same as a deduction from the investor’s taxable income.

• This makes it much more valuable.

Tax Reform Act of 1986• The low-income housing tax credit (LIHTC) program, created

in 1986 and made permanent in 1993, is an indirect federalsubsidy used to finance the construction and rehabilitation oflow-income affordable housing.

• The LIHTC program represents the largest federal housingprogram in existence in terms of the number of unitsdeveloped each year.

• The program acts as an incentive for private developers andinvestors to provide more low-income housing.

LIHTC Background• The Tax Credit program is contained in Section 42 of the Tax

Code.

• The program is administered by state housing finance agencieswith each state receiving a fixed allocation of credits based onthe state’s population.

• The state credit agencies decides which projects receive creditseach year pursuant to allocation guidelines and the state’sQualified Allocation Plan (QAP). Federal law requires that theQAP give priority to projects that serve the lowest-incomehouseholds and that remain affordable for the longest period oftime.

Role of the Key Players

SYNDICATORS

MANAGEMENT

OWNERS/DEVELOPERS

STATE AGENCY

IRS

Internal Revenue Service (IRS)• First affordable housing program administered by Treasury

Department.

• Makes revisions to statute as needed.

• Oversee agencies.

• Makes recapture and noncompliance decisions.

State Housing Agencies• In California, the California Tax Credit Allocation Committee is

the State Housing Agency

• Allocates tax credits.

• Acquisition & substantial rehabilitation.

• Monitors compliance.

• Reviews property record keeping.Fiona Ma

California State Treasurer

Owner / Developer

• Completes the application according to the Qualified Allocation Plan (QAP).

• Usually remains as General Partner (GP).

• Has own reporting requirements.

Owner / Developer• Maintaining tax credit integrity is the responsibility of the owner.

• Must ensure that the on-site management team complies withall appropriate rules, regulations and policies that govern theprograms.

Syndicators• Brings the money to the table through investors.

• Usually becomes the Limited Partner but could be co-GP.

• Has own reporting requirements.

Management• Responsible to the owner/developer for implementing the

applicable program requirements correctly.

Frequently Used Terms• Total Development Cost – Includes all project costs.

• Eligible Basis – Depreciable basis of residential rental housing(exclude costs not related to residential rental housing or thatare not depreciable).

• Qualified Basis – includes eligible basis costs of only the unitsoccupied by qualified tenants.

Frequently Used Terms• Applicable Fraction – the lesser of the percent of units or

square feet qualifying for credits. Calculated annually.

• Tax Credit Regulatory Agreement – Document containing theterms and restrictions for maintaining a tax credit property.

• Applicable Percentage Rate – Rate set monthly for the 9%and 4% credits.

• Area Median Income (AMI) – the midpoint of a region’s incomedistribution – half of the families in a region earn morethan the median & half earn less than the median.

The Allocation Process• The process of allocating, awarding, and then claiming the LIHTC is

complex and lengthy.

• The process begins at the federal level with each state receiving anannual LIHTC allocation in accordance with federal law.

• State housing agency then allocates credits to rental housing developersaccording to federally required, but state created, allocation plans.

• The process typically ends with developers selling allocated credits tooutside investors in exchange for equity.

Allocation from the Feds to the State• Credits are first allocated to each state according to its

population.

• In 2019, states received an allocation of $2.75625 per person,with a minimum small population state allocation of $3,166,875.

• 2019 – California’s population was approximately 40 million.

• 40 million X $ 2.75625 = $110,250,000.

Allocation from the State to Developers• Many states have two allocation periods per year.

• Developers apply for the credits by proposing plans to stateagencies, via an extensive application submission.

• An allocation to a developer does not imply that all allocated taxcredits will be claimed. An allocation simply means tax creditsare set aside for a developer.

• Once a developer receives an allocation it has several years tocomplete its project. Credits may not be claimed until a projectis completed and occupied, also known as Placed in Service.

Ownership basics• Communities are generally owned by a Limited Partnership (LP)

or Limited Liability Company (LLC).

• The LP or LLC usually consists of the General Partner and the Limited Partner.

• Limited partnership passes tax benefits on to the investor and maximizes the investor equity in the project.

Ownership basics• Limited Partner generally owns between 99 – 99.99% of the tax

credits, profits and losses.

• Limited Partner pays in capital contributions in multipleinstallments, based upon negotiated benchmarks.

Ownership basics• General Partner generally owns about 0.01%, guarantees

completion of the project, amount of credits and funding of deficits.

• Usually controls and operates the project; handles reporting and tax matters.

• May receive a share of the cash flow if allowed in the partnership agreement.

LIHTC Basics• Tax credits are taken over the initial 10-year operating period.

• Investors also take any tax losses over the entire investmentperiod.

• LIHTC are subject to recapture if the project fails to complyduring the first 15 years.

• Tax credits provide a dollar-for-dollar credit against income taxliability of investors.

Building Options• New Construction – Housing units which have not previously

been occupied.

• Rehabilitation – Any rehabilitation meeting the minimumrehabilitation expenditure requirements.

• Substantial Rehabilitation or Conversion - Any rehabilitation inwhich Hard Costs equal or exceed $20,000 per unit.

Types of LIHTCs• 9% Credits – New Construction / Rehabilitation credit rate.

This is a competitive process.

• 4% Credit – New Construction / Rehabilitation when there isfederal subsidy attached to the community (tax-exempt bonds,below market federal loans, etc.)

• 4% Acquisition Credit – used for the cost of buying an existingbuilding for which rehabilitation expenditures are incurred

Restrictions• There are always income and rent limitations.

• Income threshold election; each building must meet 1 of 2minimum thresholds:• 40/60: 40% of the units must be rented to households at or below 60% AMI.

• 20/50: 20% of the units must be rented to households at or below 50% AMI.

Project Restrictions• Rents are set at 30% or less of household’s eligible income.

• Area Median Income (AMI) is published annually by HUD,calculated based on the size of the family.

• Compliance Period - Buildings must remain rent and incomerestricted for at least 15 years; and may be subject toextended use periods.

Development vs. Building Rules• Placed In Service Date (Building rule)

• Minimum Set Aside (Development rule)

• Building Identification Number (Building rule)

• IRS Form 8609 (Building issued)

• IRS Form 8823 (Building issued)

• Applicable Fraction (Building rule)

Placed In Service• Date on which a unit can be occupied.

• On rehabs of existing tenants, can be at end of 24 month periodof expenditures.

• Trigger for all monitoring.

• Determined on a building by building basis.

Minimum Set-Aside• Minimum percentage of a property that the owner has agreed to

reserve for low income housing credit eligible households.

• Must comply with the minimum set aside by the end of the 1styear of the credit period and continue to comply throughout thecompliance period.

Minimum Set-Aside

Minimum % of units that must be rent-restricted & occupied by qualified tenants

Maximum % of gross median income level for a qualified tenant

40/60

20/50

Building Identification Number (BIN)• Assigned by the state agency

• Typically 10 digits

• Different and unique numbers

• Each building has it’s own BIN

Building Identification Number (BIN)• Example: CA-19-1218-02

• CA State the building is located

• 19 Year of allocation

• 1218 Development number

• 02 Building number

IRS Form 8609

• Low Income Housing Credit Allocation Certification.

• Form is completed partially by the State Agency and partially by the Owner.

• The form details the allocation of housing credits.

IRS Form 8823• Low Income Housing Credit Agencies Report of Non-Compliance.

• Used to report all findings of non-compliance.

Applicable Fraction• Applicable fraction is the percentage of a building that is treated

as low-income use and generally eligible for low income households.

• The applicable fraction is the lesser of the unit fraction or the floor space fraction.

Credit Period• A 10 year period of time a building’s investors can take a tax

credit on their federal income tax return.

• A building’s credit period typically starts the year it is placed inservice, but the owner has the option of beginning its creditperiod the year after they place it in service.

Compliance Period• The initial compliance period lasts 15 years.

• Buildings must remain rent and income restricted for at least 15years; and may be subject to extended use periods.

• An owner must meet the requirements of the LIHTC programper the IRS and the HFA for 15 years.

• The credits can be jeopardized by what an owner or does notdo during the 15 years.

Extended Use Period• The Extended Use Period (EUP) continues after the

Compliance Period for a minimum of 15 additional years

• An owner must commit to operating the project as an affordableproperty for the EUP

• Compliance requirements after year 15 may be looser thanduring the compliance period

0 10 15 30

Credit Period

Compliance Period

Extended Use Period

Overview of Compliance Timing

Unit Eligibility• Residential rental unit

• Living, cooking & bathing spaces.

• Non-transient occupancy • Minimum 6 month lease, unless an SRO.• Exception is Transitional Housing, exclusively to facilitate transition of

homeless with 24 months & operated by a qualified non-profit.

• Suitable for occupancy

Unit Eligibility – continued • General public use

• Must be available for the use of the general public.• Cannot be limited to members of social organization or employees.

• Intermediate care facility• Continuous care facilities are not eligible• Supportive services must be optional

• Management Exempt unit(s)

Determining # of people in the Household• Comprised of members of household that will be occupying the

unit at time of move-in.• Include absent household members).

• Exclude live-in attendants and foster children.

Verification of Income and Assets• Refer to HUD Handbook 4350.3 Chapter 5 to determine:

• Whose income is included and whose income is excluded.

• What assets are included and excluded.

• Types of income and assets.

• Verification methods.

• Calculating income and assets.

Student Rule• IRS definition is anyone attending school 5 months or more

during the calendar year

• Educational institute defines the number of hours to be full time

• Cannot rent to households comprised totally of full-timestudents unless they qualify for an exception

• If a household’s status changes and they no longer qualify foran exception, they are no longer eligible for a low incomehousing credit unit.

Student Rule - Exemptions• A unit shall not fail to be treated as a low income unit merely

because it is occupied:1. by an individual who is:

i. a student receiving assistance under Title IV of theSocial Security Act,

ii. a student who was previously under the care andplacement responsibility of the State agency responsiblefor administering a plan under part B or part E of Title IVof the Social Security Act or

iii. a student enrolled in a job training program receivingassistance under the Job Training Partnership Act orother similar Federal, State or local laws

Student Rule – Exemptions continued2. entirely by full-time students if such students are

i. single parents and their children are not dependents ofanother individual and such children are not dependentsof another individual other than a parent of suchchildren,

ii. married and filing a joint return

Available Unit Rule• If the income of a household occupying a tax credit unit

increases above 140% of the income limit (or 170% in deep rentskewed communities), the unit will continue to be treated as aneligible low income unit if the occupants initially met the incomelimitation and the unit continues to be rent restricted.

Available Unit Rule• If the income of a household occupying the unit increases

above 140% of the applicable income limitation, the unit willcease to be eligible as a low-income unit if any residential unitin the community (of comparable or small size than the unit inquestion) is occupied by a new resident whose income exceedsthe income limitation.

Resident Based Section 8 Vouchers• An applicant can not be denied housing in a tax credit

community solely for being a Section 8 Voucher holder.

Utility Allowance• 90 days to re-compute net rent

• Increase utility

• Decrease utility

• Documentation

Fair Housing, Section 504 & ADA• Follow all requirements of Fair Housing, Section 504 and

Americans with Disabilities Act (ADA).

• Violations can lead to a Notice of Non-Compliance, IRS Form8823, being issued by the State Agency.

Important Documents

• Partnership Agreement

• Final Tax Credit Allocation Letter

• Land Use or Extended Use Restriction Agreement

• Financing Documents

• Utility Allowance Information

Recapture• Under IRC §42(j)(1), if the qualified basis of a

building at the close of any taxable year in the complianceperiod is less than the building’s qualified basis at the close ofthe preceding taxable year, then the taxpayer’s federal incometax for that year is increased by the credit recapture amount.

• Recapture may not be an issue if the taxpayer discovers thenoncompliance (as opposed to discovery by the State Agencyor IRS) and corrects the noncompliance within a reasonableperiod from when it is discovered or should have beendiscovered.

Recapture• Although taxpayers claim the low-income housing credit over a

10 year period, the owner of a low-income housing tax creditcommunity is required to provide low-income housing incompliance for at least 15 years.

• In effect, the taxpayer is claiming credit in advance of providinghousing during the last five years after the credit period hasended.

• As a result, 1/3 of the credit claimed each year during the 10year Credit Period is associated with the provision of housingduring years 11 through 15 of the Compliance Period.

Recapture• The 1/3 portion of the credit claimed each year is known as the

Accelerated Portion of the credit.

• The Accelerated Portion of the credit subject to recapturedecreases during the last five years of the Compliance Periodas the taxpayer provides the housing for which the taxpayerclaimed the accelerated credit during the Credit Period.

Self Audit Checks • Resident files are neat, orderly and easy to audit.

• Set-asides and first-year fractions are met.

• Recertifications have been completed timely.

• All documents are accurate, complete signed and dated.

• Any non-compliance has been corrected.

• Utility allowance documentation is updated and current.

• Marketing records are available.

8823 Guidebook

You can find the 8823 Guidebook at

www.irs.gov

or

https://www.irs.gov/pub/irs-utl/lihc-form8823guide.pdf

Documentation• If something is not documented, then it did not happen.