The Internal Revenue Service (IRS) will temporarily suspend low-income housing tax credit (LIHTC) tenant-income limitations and non-transiency rules to allow project owners to rent their vacant units to individuals and families who lost their homes due to Hurricane Sandy even if those individuals do not qualify as low-income persons. Notice 2012-68, which is similar to the relief provided to victims of hurricanes Katrina and Rita, requires owners to receive prior approval from their state housing agency to temporarily house displaced individuals up until Nov. 30, 2013. Projects in any state are eligible regardless of whether a major disaster was declared in the state where the project is located.
Under the notice, an individual is eligible for temporary housing if that person resided in a jurisdiction designated for individual assistance and who was displaced because his or her residence was destroyed or damaged as a result of the devastation caused by Hurricane Sandy. The president declared major disasters in Connecticut, New Jersey, and New York, and the Federal Emergency Management Agency (FEMA) designated jurisdictions in those states for individual assistance. The notice also provides special rules concerning the status of a unit in an LIHTC project rented to a displaced individual.
Units in the first year of the credit period
A displaced individual temporarily occupying a unit during the first year of the credit period will be deemed to be a qualified low-income tenant for purposes of determining the project’s qualified basis and for meeting the project’s 20–50 test or 40–60 test as elected by the project owner. A displaced individual will no longer be deemed a qualified low-income tenant once the temporary housing period ends.
Vacant units after the first year of the credit period
During the temporary housing period, the status of a vacant unit (that is, market-rate or low-income, or never previously occupied) after the first year of the credit period that becomes temporarily occupied by a displaced individual remains unchanged, and that person will not be treated as a qualified low-income tenant. This means that even if a unit is rented to a displaced person, a low-income or market-rate unit that was vacant before the effective date of the notice (Oct. 22, 2012) will continue to be treated as a vacant low-income or market-rate unit. Similarly, a unit that was never previously occupied before Oct. 22, 2012, will continue to be treated as a unit that has never been previously occupied even if it houses a displaced individual.
Consequently, the fact that a vacant unit becomes occupied by a displaced individual will not affect the building’s applicable fraction for purposes of determining the building’s qualified basis, nor will it affect the minimum set-aside test. If the income of occupants in low-income units exceeds 140 percent of the applicable income limitation, the temporary occupancy of a unit by a displaced individual will not cause application of the next available unit rule. Finally, the project owner is not required during the temporary housing period to make attempts to rent to low-income individuals the low-income units that house displaced individuals. Once the temporary housing period has ended, all the suspended LIHTC rules will once again be applicable.
Certifications and record-keeping
Owners must also maintain and certify information concerning each individual including the name, address of damaged residence, Social Security number, and a statement signed under penalties of perjury by the displaced individual that, because of damage to the individual's residence in a jurisdiction designated for individual assistance by FEMA as a result of the devastation caused by Hurricane Sandy, the individual requires temporary housing.
The owner must also certify the date the displaced individual began temporary occupancy and the date the project will discontinue providing temporary housing as established by the agency. The certifications and record-keeping for displaced individuals must be maintained as part of the annual compliance monitoring process with the agency.
Rent for units that house displaced individuals cannot exceed the LIHTC restricted rates for low-income units.
Finally, owners must obtain prior approval from their state housing agency, and that agency will determine the appropriate period of temporary housing, but not later than Nov. 30, 2013.
Revenue Procedure 2007-64
Project owners should review Revenue Procedure 2007-64, which provides comprehensive disaster relief for LIHTC projects located in areas that FEMA has designated for individual assistance and/or public assistance under the president’s disaster declaration (Major Disaster Area). If an owner has a carryover allocation, the revenue procedure allows up to an additional six months to satisfy the “10 percent test” and an additional one-year period to place its project in service subject to the state housing agency approval.
For buildings in the first year of the credit period that are located in a major disaster area and are severely damaged or destroyed as a result of the disaster, the state housing agency has the discretion to treat the allocation as returned credit to the agency or may toll the beginning of the first year of the credit period until the project is restored. The tolling time period is up to 24 months from the end of the year in which the disaster was declared.
Also, owners in major disaster areas have up to a 24-month period from the end of the calendar year in which the disaster was declared to restore a project that has suffered damage causing a reduction in qualified basis. Owners will not be subject to recapture and may also continue to claim the credit during the restoration period.
Susan Pristo Reaman is counsel with Nixon Peabody, LLP, and focuses on advising clients on federal tax credit issues for the LIHTC and related IRS Form 8823 compliance matters; the New Markets Tax Credit, specializing in targeted population transactions; the historic tax credit; and the renewable energy tax credits.