NMHC Urges a Final Rule on the LIHTC Average Income Test Option

The National Multifamily Housing Council joined 31 other commercial real estate trade groups, CRE businesses, professional firms, and others in a letter that urges the IRS and U.S. Treasury to issue a final rule Housing  Credit  Average  Income  Test  (AIT)  minimum  set-aside.

The groups either want the final rule to incorporate “consensus modifications” the groups have offered or to announce a new proposed rule that would allow another period of public comment.

In 2018, Congress made changes to the low-income housing tax credit (LIHTC), including an income averaging occupancy set-aside. The previous standard included two set-aside tests, one of which property owners had to meet.

One was that at least 20% of the set-aside units had to be occupied by households with incomes no higher than area median incomes (AMIs). The other, at least 40% of the units had to be restricted to households at or below 60% AMI.

In October 2020, according to Virginia Housing, the IRS proposed a rule that would offer three options, one of which a property owner would need to meet to qualify for the tax credit:

1. At least 20% of units are rent-restricted and house people at 50% or less of AMI adjusted for family size.
2. At least 40% of units are rent-restricted and occupied by people at most 60% of AMI adjusted for family size.
3. At least 40% of low-income units in the project are income qualified, rent-restricted, “and occupied by individuals whose income does not exceed the imputed income limitation designated by the taxpayer at an average of 60% AMI or less,” known as the Average Income Minimum Set-Aside, or AIT.

In the letter, according to NMHC, the signees asked that “such final regulations address deficiencies in the regulations proposed in 2020, including those pertaining to minimum set asides, modifications to unit designations, and casualty losses. Alternatively, the organizations requested that the government announce an intention to publish a new rule.”

“In particular, we are concerned that the proposed regulations: (1) pose excessive risk to violating minimum set-aside rules; and (2) prevent taxpayers from modifying income designations and, thereby: (A) trigger potential conflicts with other Federal statutes, (B) potentially prevent the use of other Federal subsidy programs, and (C) create difficulties for prospective residents on waitlists or to correct compliance issues,” NMHC wrote

To address these issues, NMHC and NAA are requesting that the final regulations: (1) treat LIHTC set-aside requirements to be met so long as 40 percent or more of the units in a project are occupied by residents earning an average of 60 percent or less of AMI; and (2) enable taxpayers to modify unit designations so long as the change: (1) does not cause the development to violate set-aside requirements; and (2) the State Housing Finance Agency approves.

In the joint letter, the groups also argued that the IRS rule would create “potential conflicts with  federal laws such as the Fair Housing Act, the Violence Against Women Act, and Section 504 of the Rehabilitation Act of 1973.”

The proffered changes, the groups behind the letter argued, would allow projects to admit households that make up to 80% of AMI using income averaging. “Income averaging provides owners the option of reserving 40 percent (25 percent for New York City) of the units in a property for people whose average income collectively is below 60 percent of AMI,” NMHC notes.