Common Confusion Relating to LIHTC Compliance Issues (Part 2 of 2)
By Caitlin Jones & A. J. Johnson
6 min read
Last month, I wrote about some of the common areas of confusion and errors regarding compliance requirements under the low-income housing tax credit program. This confusion among owners and property managers has, in my experience, been evidenced by misinterpretations and actions that have or potentially may lead to noncompliance findings.
Part 2 of this article touches on some additional areas of confusion and mistakes.
140% Move Outs
Under the LIHTC “next available unit rule,” a unit occupied by a tenant that originally qualified as low-income will continue to be treated as a low-income unit if the tenant’s income exceeds 140% of the applicable income limit for a low-income household, if the next vacant unit of comparable or smaller size is rented to a new low-income tenant.
Too many property managers believe, incorrectly, that a household recertified above 140% of the income limit must leave their unit. Some managers have even asked how to best evict such households, and I’ve seen lease addendums which say a household must vacate its unit if it recertifies above 140%. These tactics aren’t necessary – and can be reported as noncompliance.
Provided the next available unit rule is properly followed, an over-income tenant doesn’t need to move out and the owner won’t lose tax credits for allowing the tenant to stay.
Confusion Regarding Students
Property managers are often confused about the student status restrictions for tax credit projects.
In doing trainings I emphasize, “student status is only a concern when all members of the household are full-time students. As long as one member is not a full-time student there is no concern.”
Many managers mistakenly believe student status must be verified for all students in all households, and that any household with a full-time student must meet one of the qualifying exceptions. This isn’t so, and increases the paperwork burden.
Regarding students, managers must also be aware that certain financial aid – once always excluded – may now be counted as part of household income. A rundown on the applicable requirements is in the HUD Handbook and IRS 8823 Guide. Make sure tenant files include verification of tuition and financial aid.
Two other rules impact student eligibility for tax credit projects.
The first is a change made by the Mortgage Forgiveness Debt Relief Act of 2007, which enables a single-parent full-time student whose children are all full-time students to be eligible to occupy a tax credit unit, whether or not this parent claims the children as dependents on his or her tax return. Before the 2007 Act this parent had to claim the children as dependents to be eligible for a tax credit unit; the 2007 Act allows for the single-parent household to qualify even if the other, absent parent claims the children as dependents. This change enables more single-parent households comprised entirely of full-time students to qualify.
This change was retroactive. Accordingly, owners of projects previously reported for noncompliance in this area on IRS Forms 8823 may be able to get these forms amended by the IRS or state housing agency.
The second rule stems from a provision in the Housing and Economic Recovery Act of 2008, signed July 30, extending eligibility under the student qualifying exceptions to children who received foster care assistance.
Year-to-Date Confusion
Managers nationwide test household income using a “year-to-date” (YTD) income calculation, along with – or in place of – a calculation of the tenant household’s anticipated annual income.
When verifying an income source, such as employment, managers should include a YTD amount when verifying the anticipated amount. The YTD amount should be used as a comparison tool to ensure accuracy with the anticipated wage information given. The YTD earnings amount is typically found on the Employment Verification (EV) form.
Keep a few things in mind. First, remember the process of certifying a household for LIHTC eligibility requires the household’s anticipated income amount to be tested against the applicable tenant income limit. YTD pay, on the other hand, looks back in time. All files must fully document anticipated income. Therefore, when comparing the YTD approach with the anticipated information, contact the employer to clarify the nature of any inconsistencies. Managers shouldn’t disqualify a potential household based on a YTD calculation without follow-up. There may be a valid explanation for the discrepancy, such as the individual had to work extra hours due to training or staff shortages. In these cases, as long as the file documents that the additional pay isn’t likely to resume, the higher YTD calculation shouldn’t appear on the Tenant Income Certification form.
To accurately compute a YTD income calculation, divide the YTD amount by the correct number of full pay periods reflected in the amount. The employer will probably need to be contacted to obtain the starting date and pay period frequency, since this information isn’t provided by the typical EV form. Don’t assume all YTD amounts start January 1st; most payroll systems won’t do this if January 1 falls in the middle of a pay period. In addition, some YTD amounts will include part of December, while others might not begin until later in January. Moreover, assuming that all YTD math should utilize a weekly approach will give an inaccurate result for individuals paid monthly, semi-monthly, etc.
Finally, I’ve seen some files which examine the YTD amount and what day of the week is given as the “as of” date. The math divides the amount by partial weeks, all but guaranteeing an inaccurate result. Remember, the typical employee doesn’t get paid at the end of each workday. If paid every two weeks, the individual’s YTD income amount will reflect the cumulative total of their completed pay checks. It won’t reflect partial pay periods worked but not closed out. Therefore, always divide the YTD amount by the exact number of full pay periods included in the amount, and always find out the pay frequency.
Erik Whitton works for Spectrum Enterprises, Inc. based in Cape Elizabeth, ME. Spectrum offers training and consulting services for affordable housing professionals (www.spectrumlihtc.com, www.spectrumseminars.com). Erik may be reached at 207-767-8000 x210 or [email protected].
