Simplifying the Process: Establishing the Correct Income Limits for LIHTC Projects

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Determining the correct income limits to use for a low-income housing tax credit (LIHTC) project is critical, as they will determine both the maximum annual income for resident households qualified to occupy tax credit units as well as the maximum rents for such units.

Selecting the correct income limits can be complex, though, especially for existing projects that are being awarded housing credits for the first time and for newly resyndicated tax credit deals that had a prior allocation of credits.

Understanding a few basic rules relative to income limits can make the process much simpler and prevent management from making a mistake that could result in a loss of tax credits.

An Overview of Income Limits

The U.S. Department of Housing and Urban Development (HUD) publishes updated income limits for the LIHTC and Multifamily Tax-Exempt Bond Programs once a year. These limits, released in December and immediately effective, are known as the Multifamily Tax Subsidy Project (MTSP) Income Limits.

HUD also publishes a National Nonmetropolitan Income Limit (NNMIL), which may be used for certain LIHTC projects located in rural areas. Some areas will also be subject to “HERA Special” income limits.

Except for NNMIL, the rules for the different income limits apply to both 9% and tax-exempt, bond-financed 4% credit projects.

Income limits are published by household size, and the income limit is based on the number of persons that will reside in the unit. When using income limits to calculate maximum tax credit rents, imputed income is used based on an assumption of 1.5 persons per bedroom. For example, when calculating the maximum rent for a two-bedroom unit, the income limit for three people is used (two bedrooms times 1.5). However, the income limit would be based on the actual number of people who occupy the unit.

Income Limits for New Construction Projects

New construction LIHTC projects may generally use the income limits in effect on the date that the project is placed in service, as long as the process of qualifying residents also begins at this time.

The placed-in-service date for newly constructed projects will be the date that the project was determined to be available for occupancy. This is normally indicated by the date on the local Certificate of Occupancy (CO) issued for the development. A “temporary” CO can also serve this purpose.

Owners and managers should keep in mind that HUD’s prior income limits may be used for 45 days after the release of the new income limits. This means that the old limits can be used for a new property that is placed in service within 45 days after the issuance of the new income ones, if it is advantageous to the project (i.e., the old limits are higher than the new limits, such that the household income and rent limits would be greater).

Example: HUD’s 2015 income limits are released on December 1, 2014, and are lower than the limits in effect prior to December 1. A new property is placed in service after December 1, 2014, but before January 15, 2015 (45 days after the release of the new limits). In this case, as long as the process of qualifying residents has begun, the property may use the 2014 limits for purposes of qualifying residents and for determining rents. This provision is explained in IRS Revenue Ruling 94-57.

Income Limits for Acquisition/Rehab Projects

For an existing property that has been purchased and obtains an allocation of tax credits, the placed-in-service date is the date on which the new owner acquired the property, assuming that it is either occupied or may be occupied based on state or local law. The income limit in effect on this date (keeping in mind the 45-day rule discussed above) is the appropriate one to use for purposes of qualifying residents and determining tax credit rents.

Some properties that have had prior allocations of tax credits are resyndicated and receive new credit allocations. These properties have a new placed-in-service date – the date of acquisition by the new owner. These properties must use the income limits in effect when the property was placed in service, even if the limits are lower than the income limits the property previously used.

Example: A property placed in service in 1998 under a prior allocation receives a new credit allocation and is subsequently placed in service for acquisition purposes in 2014. The income limits in effect on the new placed-in-service date must be used for the property, even if the property had been using 2013 limits that were higher than the 2014 limits. Keep in mind, however, that residents who were income-qualified under the prior allocation remain qualified under the new allocation and are not required to requalify under the new income limits.

‘Hold Harmless’ Rule, Special HERA Limits

The Housing and Economic Recovery Act (HERA) of 2008 established a policy of holding tax credit projects harmless from reductions in income limits. This means that all tax credit properties may use the highest income limits (for both income eligibility and rent determination) that have been in place since the property was placed in service and began qualifying residents.

HUD also publishes “HERA Special” income limits for some areas. These limits are used by LIHTC properties that were in service prior to 2009. Properties placed in service after 2008 are not permitted to use these HERA Special limits.

National Nonmetropolitan Income Limit

HUD also publishes a National Nonmetropolitan Income Limit (NNMIL) once a year, usually in December. In some cases, this limit is higher than the MTSP income limit. Projects located in rural areas may use the higher of the NNMI limit or the MTSP limit. This option, though, is not available for projects financed by tax-exempt bonds.

Rural areas are defined in Section 520 of the Housing Act of 1949. Areas eligible for assistance under programs of USDA’s Rural Housing Service also qualify as rural.

Income Limits with Layered Programs

Many LIHTC properties are layered with other programs, some of which have their own income limits (e.g., Section 8, Section 515, HOME). In these cases, with the exception of the Rural Development Section 515 Program (which defers to the LIHTC income limits), the limits of all programs must be adhered to. Essentially, this means that if there are multiple income limits at a property, the lowest limits for all the applicable programs must be used.

New HUD Definition of Extremely Low-Income

Since 1998, HUD has published income limits for extremely low-income (ELI) households, defined as 30% or less of the area median income (AMI), based on family size.

The Consolidated Appropriations Act of 2014 amended the definition of extremely low-income as being the greater of 30% of AMI or the national poverty level as published annually by the U.S. Department of Health and Human Services.

This has created an increase in the ELI limits for at least one household size in all but 13 U.S. counties. The change does not impact Puerto Rico, the U.S. Virgin Islands, or Guam. While this change will allow more people to qualify for HUD programs, it has no direct impact on LIHTC projects, since the income limits applicable to the tax credit program are 50% and 60% of the area median income. However, owners and managers should keep in mind that any state-set asides requiring occupancy by households at the 30% level may be affected by this change. Owners should check directly with state agencies for the specific requirements.

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].