The LIHTC Student Rules; Critical but a Source of Confusion

By Caitlin Jones
January 4, 2010 6 min read

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By A. J. Johnson

Tax Credit Advisor, January 2010: When developing or managing a low-income housing tax credit (LIHTC) property, it’s critical to be familiar with the program’s “student rules” as set out in the federal tax code and in Internal Revenue Service regulations and guidance. Otherwise, owners risk the loss or recapture of housing credits.

A review of the student rules is in order given their complexity and recent legislative and regulatory revisions.

Under Section 42 of the Internal Revenue Code, a housing unit qualifies for the housing tax credit if it is (1) rent-restricted and (2) occupied by a low-income household.

In general, units occupied entirely by full-time students are not treated as low-income units and are ineligible for housing credits. However, Code Section 42 provides five exceptions, which apply both to LIHTC properties and to tax-exempt bond-financed projects not claiming credits. Under these exceptions, a unit occupied by a household comprised entirely of full-time students that meets the LIHTC program’s income limits may qualify as a low-income unit if:

1. Any member of the household is enrolled in a federal, state, or local job training program;
2. Any member of the household receives assistance under Title IV of the Social Security Act (“TANF” or “foster care”);
3. The students are single parents and their children, and none are dependents of a third party (the children, though, may be claimed as dependents by the other, absent parent);
4. The students are married adults and eligible to file a joint tax return. Note: These individuals need not actually file the joint return, and need not be married to each other; or,
5. Any member of the household was previously under the care and placement of the foster care program under Title IV of the Social Security Act. This exception was added by the Housing and Economic Recovery Act of 2008. The law does not specify any timeframe during which such assistance had to have been received, and the IRS has not issued any guidance to date. Until formal federal guidance is published, owners and managers should seek the advice of their state housing credit agency regarding its position on this exception.

Definition of Full-Time Student

A full-time student is defined as an individual who during each of five months during the calendar year:

• Is a full-time student at an educational organization, as defined in Code Section 170(b)(1)(A)(ii). According to the IRS’ 8823 Guide, the term educational organization includes elementary schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools, but not on-the-job training courses.
• Is pursuing a full-time course of institutional on-farm training under the supervision of an accredited agent of an educational organization or of a state or state political subdivision. On-farm training are school-administered programs held on farms that educate students about farming and agriculture.

The calendar year used for the five-month rule is that of the taxpayer that claims the student as a dependent. In many cases, students living in LIHTC properties may not be claimed as dependents on another person’s tax return. If the student does claim themselves as a dependent, the calendar year in which the student’s taxable year begins should be used.

To be considered full-time, a student must attend school for at least part of any five calendar months during the year (the months need not be consecutive), and be classified as a full-time student by the school that they are attending.

Owners or managers should verify the student status of each new tenant household before move-in. This verification can be completed up to 120 days before move-in. In addition, the student status of each existing low-income household should be verified annually. In mixed-income projects, according to the 8823 Guide, this can be combined with the annual tenant income recertification.

Vigilance in this area is crucial. For example, an individual that graduated from college in May but is not a full-time student when applying for an LIHTC unit in September would not be eligible for a credit unit because they were a full-time student during five months of the calendar year. The following January, however, they would qualify.

Student Income Issues

In 2009, the U.S. Department of Housing and Urban Development (HUD) released handbook changes that clarify what specific amounts must be treated as income for student households.

The two income issues relating to students that often confuse LIHTC owners and managers are the “$480 rule” and grants or scholarships.

$480 Rule

HUD’s rules for calculating the income of a household, which LIHTC projects must follow, only count up to $480 in earned income per year for full-time students. A full-time student is an individual 18 or older who is not the head or co-head of the family or a spouse. A “co-head” is an adult member of the family who is treated the same as a head of household for purposes of determining income, eligibility, and rent.

HUD requires a unit’s lease to be signed by the head of the household, spouse, any co-head, and all adult occupants. Therefore, requiring that a full-time student 18 or older sign the lease would appear to categorize that student as an adult, as defined by HUD. Since all earned income of adults must be counted, as opposed to dependents, it is recommended that full-time students 18 or over not sign as a party to the lease if the owner wishes to count only $480 of employment income.

When only counting $480 of earned income for full-time students aged 18 and above, managers should verify all income and the full-time status of the student.

Grants and Scholarships

HUD Handbook 4350.3, Change 3, requires counting grants or scholarships as income to the extent that they exceed tuition, but only for students who receive HUD Section 8 rental assistance. This rule has created confusion. Some argue that because household income under the LIHTC program must be calculated in a manner consistent to that used in the Section 8 program; that grants and scholarships should be treated as income for all tax credit residents who are students, regardless of whether or not they receive Section 8 assistance. However, to do so would violate Section 8 rules, which require that the excess income be counted only if Section 8 assistance is present. Therefore, grants or scholarships should be excluded from income for students in LIHTC units, unless they receive Section 8 assistance. The IRS 8823 Guide confirms this view.

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].