On June 13, 2018, the NCSHA submitted a letter to the Treasury Department and the IRS in regards to the new income averaging minimum set-aside option in the hopes to ensure its successful implementation.
State Agency Implementation
In the letter, NCSHA indicates that some State Allocation Agencies are already working to establish procedures so owners can take advantage of this new election option and indicates it expects more states to do so soon. But, at the same time, it indicates some will likely postpone implementation until more implementation guidance is issued and others may never implement the option. (The latter choice is believed to be acceptable as NCSHA does not feel the provision provides a legal obligation requiring the states to implement it.)
NCSHA indicated that the agencies that are working to make the option available are prepared to make program decisions and provide strategies for implementation knowing that means making determinations on the following:
- Restrict income averaging in developments with market-rate units.
- Establish a process for designating units at various income levels and whether or not to allow units to float.
- Institute procedures that would allow owners to change unit designations over time, so long as the 60% average is maintained.
- Determine how many income designation levels any individual project may have; for example, a state may want to limit the number of different income designations it allows for any individual project, even though the IRC provides seven different income designation possibilities (20, 30, 40, 50, 60, 70, and 80% AMGI).
- Require owners of multiple building developments that elect income averaging to do so for all buildings in the development rather than making different elections for different buildings.
- Set the testing period for compliance with income averaging designations. (The letter cited an example, specifically stating allocating agencies may want to use the end of the year as the end of their testing period and allow for owner certifications of designations.)
- Require income recertifications for 100% properties if the agency deems it necessary.
- Limit or prohibit income averaging for resyndication deals.
- Require unit parity in regards to bedroom size by income designation to prevent owners from designating larger units at higher income designations and smaller units at lower income designations.
- Adjust compliance monitoring fees to reflect the additional work agencies may need to do to monitor developments that elect income averaging.
The letter indicates the above decisions are all within the states’ purview to implement as they best deem fit for their state needs.
State Compliance Monitoring
The letter indicates that the states working on implementation are also working on their approach to compliance monitoring. In the letter, NCSHA explains that to assist these state agencies, NCSHA has provided hypothetical examples outlining scenarios that illustrate when a property that elected the income averaging set-aside would be in compliance and out of compliance.
As these scenarios have already been provided by NCSHA to the state agencies, I thought it important to share them so you can begin to see how NCSHA and most agencies are interpreting the rule:
- Example: 10-unit property with 4 units at 20% and 6 units at 80% resulting in an income average of 56%.
- In Compliance:
- Owner achieves the 56% average by renting 4 units to income qualified tenants at or below 20% AMGI and 6 units at or below 80% AMGI.
- At the end of the first year of the credit period, the 4-20% units are rented to income qualified households, but the 6-80% units have never been rented. The project has met its income averaging minimum set-aside because 40% of the units are occupied by qualified households with an average income of 20%.
- Out of Compliance:
- Over income at initial occupancy: One of the 20% units is rented to a household who, at the time of initial occupancy, has a gross annual household income of 25%. The income averaging of the remaining nine units is 60% (3 units at 20% and 6 units at 80%). The project does not fail its income averaging minimum set-aside, but the unit is not in compliance with its designated restriction. This unit is out of compliance on the date of initial occupancy, and the monitoring agency should report it as an over-income unit by checking 8823, Line 11a.
- Ineligible full-time student household: One of the 20% units is rented to a household who, at the time of initial occupancy, has a gross annual household income below 20%, but all household members are full-time students who do not qualify under any of the exemptions to the student rule. The unit cannot be treated as a Housing Credit unit even though the household is income-qualified. The income averaging of the remaining 9 units is 60% (3 units at 20% and 6 units at 80%). The project does not fail its income averaging set-aside, but the unit is out of compliance on the date of initial occupancy and the monitoring agency should report it as occupied by an illegible full-time student household by checking 8823 Line 11l.
- Failed income averaging minimum set-aside in the first year: The owner leases up the 6- 80% units before renting any of the 20% units. At the end of the first year of the Credit Period, only 1 of the 20% units is rented to a qualified household. The income averaging of the qualifying units is 71% (1 unit at 20% and 6 units at 80%). The project fails its income averaging set-aside, thus the owner may not make this year the first year of the Credit Period. The owner must address the noncompliance issue for the next year in order for the property to be a qualified Housing Credit development.
- Failed income averaging minimum set-aside after the first year: Two of the 20% units are rented to households whose incomes at initial occupancy exceeds 20%. At the end of the taxable year, the income averaging of the remaining units is 65% (2 units at 20% and 6 units at 80%). The project is out of compliance with its income averaging set-aside on the last day of the owner’s taxable year. The monitoring agency should file Form 8823, checking both Lines 11a to report the over income households and 11f to report the violation of the income averaging minimum set-aside.
- Over rent: All of the 20% units are rented to households whose incomes at initial occupancy are at or below 20%. However, the owner is charging rent for 1 of the units that exceed the 20% AMI rent limit. At the end of the taxable year, the income averaging of the remaining units is 60% (3 units at 20% and 6 units at 80%). The project is in compliance with the income averaging set-aside; however, the monitoring agency should file Form 8823, checking Line 11g to report the applicable unit as out of compliance with the designated rent restriction.
- Failed Uniform Physical Condition Standards (UPCS) inspection: The monitoring agency finds that 2 of the 20% units and 1 of the 80% units are out of compliance for UPCS violations. The income average of the remaining units is 62% (2 units at 20% and 5 units at 80%). At the end of the taxable year, the UPCS violations remain uncorrected and the project is out of compliance with the income averaging set-aside. The monitoring agency should file Form 8823, checking Line 11c to report the UPCS violations and Line 11f to report the violation of the income averaging minimum set-aside.
Request for IRS Clarification
The remaining portion of the letter indicates the items NCSHA feels needs IRS action or guidance and are the same items stated in the 2018-2019 Priority Guidance comments. (To read more about the 2018-2019 Priority Guidance plan the letter NCSHA submitted to the IRS, click here.)