The IRS’s Office of Chief Counsel recently released the memorandum, “Low-Income Housing Credit – Noncompliance Resulting from Conflicting Program Requirements,” to serve as guidance for examiners who audit issues related to low-income housing tax credits (LIHTC). The memorandum provided an explanation on the qualification status of a building as low income – in accordance with Section 42 of the Internal Revenue Code – in the event that an owner does not renew a tenant lease because the tenant’s rising income conflicts with another federal, state or local program.
The 2015 LIHTC memorandum requirements explained
The memo explains that a building does not become disqualified when a tenant’s income rises above the allotted threshold. The LIHTC program was not designed to remove residents who increase their income. That is why the unit is still considered to be “low-income” for tax credit purposes if the same resident still lives there, receives restricted rent and originally qualified as low-income at move-in. However, to stay in compliance with other federal, state or local programs, the property owner may choose not to renew a tenant whose income exceeds the applicable limits. In this situation, the memo indicates it is not a violation of the LIHTC program and is considered good cause for not renewing the lease. However, if they do not have good cause, and the tenant qualifies for low-income status, despite increasing his or her income over the LIHTC income requirements, the owner or property manager will be subject to immediate tax credit recapture.
Section 42 protects households from eviction or displacement if they qualified for low-income status before they experienced a bump in income. According to the IRS website, low-income status applies to the building for up to a 140 percent increase to a tenant’s income above the LIHTC program threshold requirements. At that point, the unit is still considered “low-income” as long as the next available unit of the same or smaller size is rented to a qualified low-income tenant.
Changes from the 2007 memorandum
What is new about this memo is how conflicting program requirements are handled. Under the previous memo, the removal of a tenant with rising income to stay in compliance with another program was a direct violation of the LIHTC program. The previous memo indicated that this circumstance was not good cause to prevent the renewal of a tenant. At that point, the building lost its low-income status and credits were recaptured.
The new memo directs IRS agents to focus on the extended low-income housing commitment, and allow an appropriate party to determine whether or not the non-renewal of a tenant was for good cause. Applicable state and local laws will be taken into consideration along with the rules of the other federal, state or local program in question. The extended low-income housing commitment is an agreement between the state housing agency and the taxpayer. It typically runs for a minimum of 30 years, but could be longer. One of its requirements is that the property continues to rent to qualified low-income tenants and maintain the applicable fraction (percentage of property that is reserved for low-income residents) even after the compliance period under Section 42 expires. The new memo encourages agents to determine if this agreement is still being honored by the taxpayer and that the applicable fraction is maintained.
This is a big win for owners who qualify for LIHTC, as it is a more common sense approach. This protects the owner’s right to claim credits, but still allows them to stay in compliance with other programs.
Important note for property owners
The primary conclusion of the new memo is that the removal of a tenant due to a rise in tenant income may not be a violation of LIHTC requirements if the owner is trying to comply with other federal, state or local programs. It is important to note that the memos discussed in this article are not cited IRS authority and cannot be relied upon in court, but they do give taxpayers a glimpse into how the IRS views the situation.