IRS Issues Revised 8823 Guide With Number of Changes from Original

By Caitlin Jones
November 16, 2009 12 min read

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Tax Credit Advisor, November 2009:

By A.J. Johnson

On September 25, the Internal Revenue Service released the revised 8823 Guide. The Guide is intended to provide assistance to state housing credit agencies in completing IRS Form 8823, which is filed with the Service to report incidents of noncompliance in low-income housing tax credit (LIHTC) projects, or the correction of noncompliance.
This article describes major IRS clarifications and changes from the original Guide, which was issued in January 2007. LIHTC owners and managers are encouraged to review the revised Guide in detail and consult their professional advisors regarding the effect of the revised Guide’s changes on their property operations.

Following are clarifications and changes made in the revised Guide, broken down by chapter:

Introduction

• The IRS clarifies that quick correction of noncompliance by taxpayers is indicative of due diligence, but may not preclude an IRS audit.
• If an 8823 is submitted to the IRS to report the correction of noncompliance such that the project is back in compliance, the owner will not receive an “out of compliance” letter from the Service. Note: This doesn’t mean that the property is entitled to all housing credits; owners must file accurate tax returns reflecting the status of the property relative to eligibility to claim credits.
• Receipt of any uncorrected 8823 will result in an IRS review of the owning partnerships’ prior three tax returns and all previously issued 8823s. This review is intended to determine the audit potential of the project. Again, no better reason to avoid an uncorrected 8823 (or any 8823).

Household Income Above Income Limit Upon Initial Occupancy

• The revised Guide confirms that promises made in an Extended Use Agreement for additional set-asides beyond the federal minimum level are not a noncompliance event reportable to the IRS on 8823.
• During reviews, HFAs must examine the initial income certification for tenants that moved in within the last year, and the most recent recertification for continuing tenants.
  • For HFA reviews after July 30, 2008, of 100% low-income projects for which the owner is not performing annual recertifications, the HFA must always review the initial income certification. This greatly increases the importance of sound documentation at move-in.
• The HUD rule for counting children under joint custody as occupants for eligibility is that they must spend at least 50% of the time in the unit. The IRS has clarified its position, stating “If disputed, determine which parent claimed the children as dependents for purposes of filing a federal income tax return.”
• Changes in Family Size. Significant changes here include the following:
  
  • Family size increases. The addition of a new member to a low-income household requires income certification of the new member, including third-party verification. How the new tenant’s income is treated is as follows:
  • In a Mixed-Income Project, the new tenant’s income is added to the income disclosed on the existing household’s most recent income certification. Requalification isn’t required. If total new income for the expanded household exceeds 140% of the LIHTC qualifying income level, the available unit rule is in effect. The effective date of the certification doesn’t change, nor does the due date for recertification.
  • In a 100% Low-Income Project, the new tenant’s income is added to the income disclosed on the existing household’s original income certification.
  • Original Household No Longer Occupies the Unit. Once all of the original members of the household have vacated a unit, the remaining tenants must be certified as a new income-qualified household, unless:
    • For mixed-income projects, the newly created household was income-qualified, or the remaining tenants were independently income-qualified at move-in; or,
    • For 100% low-income projects, the remaining tenants were independently income-qualified at move-in.

Note: Failure to certify a new household member is considered noncompliance (household ineligible at move-in) reported on Form 8823, Line 11(a).

Self-Employed Individuals

• A tax return must be filed for all self-employed individuals who operate sole proprietorship businesses or otherwise report income on federal tax return Schedule C, regardless of whether the taxpayer reports a profit or a loss. Management needs to make better use of tax returns for self-employed individuals.
• Home Office. Home businesses are permitted, as long as the primary use of the unit is residential.
  • If a tenant provides day care services, the tenant must have applied for (and not been rejected), been granted (and still have in effect), or be exempt from having a license, certification, registration, or approval as a day care facility or home under state law.

Educational Grants or Scholarships

All forms of student financial assistance, no matter how used, are excluded from annual income unless the student receives HUD Section 8 assistance. This provides IRS confirmation of the Section 8 rule stated in HUD Handbook 4350.3.

Tenant Income Certification Effective Date

• The effective date of a tenant’s income certification is the date that the tenant moves in. Income recertifications, if required, must be completed annually based on the anniversary of the effective date.
  • Tenants may be subject to income certifications for other programs that define the effective date differently. These “alternate” effective dates will not disqualify an annual income recertification for the LIHTC program, as long as the signature dates on the initial income certification and required recertifications meet LIHTC requirements (i.e. the signature date is the guiding date).
• Income certifications may be signed up to 120 days prior to the effective date, provided all verifications are within 120 days of the effective date. That is, certifications may be signed prior to obtaining verifications. This applies to move-in certifications as well as recertifications.
• All adult members of a household should sign the income certification before, or when, the household moves in.

Previously Income Qualified Household

This is an entirely new position of the IRS.

• Many LIHTC properties with expiring compliance periods are being rehabilitated and are obtaining new credit allocations for this purpose. Residents who qualified as low-income in the original project re-qualify for occupancy in the property after the allocation of additional credits. In other words, any household determined to be income-qualified at the time of original move-in for purposes of the Extended Use Agreement is a qualified low-income resident for any subsequent housing credit allocation.
  • If an owner receives additional credit for the rehabilitation of a property, and ownership doesn’t change, vacant units previously occupied by income-qualified households continue to qualify as low-income units if the units are suitable for occupancy. The owner is subject to the Vacant Unit Rule.
  • If a new owner receives credit for both acquisition and rehabilitation, vacant units previously occupied by income-qualified households must re-qualify with a new household.

Recertification Requirements

• If all buildings in a project are 100% low-income buildings, owners do not have to complete annual tenant income recertifications. “Projects” are identified based on the election made by the owner on IRS Form 8609, Lines 8b, 10a, and 10c.
• Mixed-income buildings must complete recertifica-tions within 120 days of the effective date of the original tenant income certification (i.e. move-in date).
• Remember: The available unit rule applies to all properties – even those that no longer perform recertifications. Violation of this rule due to a lack of due diligence can result in a significant loss of credits.

Eligible Basis Issues

The Guide outlines statutory changes made by the Housing and Economic Recovery Act of 2008 (HERA) regarding the treatment of federal grants and the impact on LIHTC eligible basis. If federal grants are used to fund the cost of a building, eligible basis must be reduced. Grants used for the benefit of the low-income residents (tenant programs) do not impact eligible basis. For example, if an owner uses a federal grant to replace kitchen appliances during the compliance period, eligible basis must be reduced. This applies to buildings placed in service after July 30, 2008. Buildings placed in service before will suffer a reduction in eligible basis for federal grants received for the cost of a building or for the operation of the building.

Changes in Applicable Percentage

Below-market federal loans are no longer considered federal subsidies, for buildings placed in service after July 30, 2008. Therefore, below-market loans funded through the federal HOME program or the Native American Housing Assistance and Self Determination Act aren’t considered federal subsidies. Expenditures funded by such loans now qualify for 9% housing credits. Only project costs financed by tax-exempt bond proceeds, and acquisition costs, are restricted to the 4% credit.

Gross Rents Exceed Tax Credit Limits

The Guide clarifies a couple of important issues relative to rents. First, maximum allowable rents must be calculated on both an annual and a monthly basis. Therefore, the gross rent limit can’t be exceeded in any month, even if the total rent paid for the year conforms to the LIHTC ceiling. Secondly, once a unit is determined to be out of compliance with the rent limits, the unit ceases to be a low-income unit for the remainder of the owner’s tax year. A unit will be treated as back in compliance on the first day of the owner’s next tax year if the rent charged on a monthly basis doesn’t exceed the rent limit. An owner cannot avoid the disallowance of credit by rebating excess rent or fees to the affected tenants. This second change is especially significant since it means that if a state discovers a rent overcharge, regardless of how early it occurs or whether or not it is corrected during the tax year, the affected units will lose all credits for the entire tax year.

Project Not Available to the General Public

The updated Guide notes the statutory changes made by HERA to the LIHTC General Public Use Rules. The general public use rules will not be violated because of occupancy restrictions or preferences that favor tenants who: (1) have special needs; (2) are members of a specified group under a federal or state program or policy that supports housing for such a specified group; or (3) are involved in artistic or
literary activities.

Violations of the Available Unit Rule

• This section has taken on added importance since owners of 100% low-income projects are no longer required by federal rules to complete annual tenant income recertifications. For purposes of applying the available unit rule only, all households documented as initially income-qualified households will be considered income-qualified as long as the owner demonstrates due diligence when completing the initial income certification. The available unit rule is violated if an owner of a 100% low-income project fails to rent a unit to an income-qualified household and cannot demonstrate due diligence when completing the initial income certification.
• Clarification of “comparable or smaller” unit: A comparable unit must be measured by the same method used to determine qualified basis for the credit year in which the comparable unit became available (unit fraction or floor space fraction). Since a comparable unit may need to be identified before the end of the year when the qualified basis is determined, the IRS will now permit an owner to consider a residential unit with the same number of bedrooms (or fewer) and comparable amenities to be a comparable unit. This provision also applies to determining comparable units for purposes of the “Vacant Unit Rule.”

Student Issues

• An LIHTC unit may not be occupied entirely by full-time students, with certain exceptions. The revised Guide adds a fifth student exception, for “a student who was previously under the care and placement responsibility of the State agency responsible for administering a plan under part B or part E of title IV of the Social Security Act.” This is the foster care program. The law provides for no timeframe during which the student had to be in the foster care program, nor does it place a limit on how much time may have passed since participation in the foster care program. For this reason, owners and managers should pay attention to State guidance in these areas.
• As with initial income certifications, the verification of student status at move-in may be completed within 120 days before, and is effective as of, the date of actual move-in by the household. Each year, student status verifications are required to be completed within 120 days before the anniversary of the effective date of the original student verification.
• A unit will be considered out of compliance if student status isn’t verified at the time of move-in, or if an annual student status review was performed late and after the notification of a state agency review.

Utility Allowances

• An allowance for the cost of any utilities, other than phone, cable, television, or Internet, paid directly by the tenant and not by or through the owner of the building is included in the computation of gross rent. The allowance must be computed on a building-by-building basis. In other words, each building with a Building Identification Number (BIN) must have its own utility allowance.
• The revised Guide adds three additional methods as acceptable ways to determine utility allowances, reflecting changes made by an IRS final regulation on utility allowances. These additional methods include utility allowances determined by:
  • A state or local housing credit agency;
  • HUD’s Utility Schedule Model; or,
  • An energy consumption model.
• Sub-Metering. IRS Notice 2009-44 clarifies that, for purposes of the IRS utility allowance rules, utility costs paid by a tenant based on actual
  consumption in a sub-metered rent-restricted unit are treated as paid directly by the tenant, and not as by or through the owner of the building. For sub-metered utilities, the utility rates charged to tenants must be limited to the utility company rates incurred by the building. Also, a reasonable administrative fee, not to exceed $5 per month unless state law provides otherwise, may be charged. In these cases, tenants may be billed for actual utility usage and the utility allowance for their units may be determined in accordance with LIHTC rules.

A. J. Johnson is president of A. J. Johnson Consulting Services, Inc., a Williamsburg, VA-based full service real estate consulting firm specializing in due diligence and asset management issues, with an emphasis on low-income housing tax credit properties. He may be reached at 757-259-9920, [email protected].