In this issue: Correct procedures to add a family member in a tax credit unit; units set aside for security officers; and an update on transfers between buildings based on reasonable accommodations.
QWe have heard that the Internal Revenue Service (IRS) intends to change the rule for how household members are added in a tax credit unit. Can you tell us what the impact will be and when this rule will go into effect?
AIt’s a good question and one that many people have been asking since the preliminary draft of the pending 8823 Guide from the IRS made its debut more than two years ago. Most state housing finance agencies object to the inflexible manner in which the pending change in this procedure would affect families who add household members. Here’s a snapshot of the current practice in most states:
Property managers are permitted to add adult family members even if their income will cause the family’s to increase above move-in income limits. They use the provision under the 140% threshold in Internal Revenue Code 42(g)(2)(D). In practice, it might look like the following example:
A woman who has lived alone and qualified originally for a tax credit unit now wants to add her mother who is no longer able to live alone. Rather than putting her mother into assisted care, the daughter notifies the management agent that she would like to move her mother into her apartment as an additional adult household member. Her mother has a few investments and also her Social Security check.
In most states, the management agent is permitted to certify the mother’s income and add her under the 140% increased income limit since a member of the original household already lives in the unit. It’s called the “totem pole,” and it allows changes in family composition as long as someone who was in the qualified household at move-in remains in the unit.
In our example, let’s say that at the time the mother’s income is added to the daughter’s income, the total effect shows that their income is above the move-in income limits. In most states, there is no adverse effect since they screen the income against the 140% threshold.
Under a proposed clarification to this current interpretation, the 8823 Guide reduces the status of the new household’s eligibility to the move-in limit at the time the mother is added to the family. The Guide states that it would consider the family not qualified if adding an adult family member would put them over the current move-in income limit. Translated into the example above, if the combined income of the daughter and mother are more than the move-in income limit for a family of two persons, the unit would not be eligible for tax credits. In so doing, the Guide suggests that the 140% threshold is not relevant when adding family members.
In technical fact, the Guide is correct. The Code language on this matter states the following: “… notwithstanding an increase in the income of the occupants of a low-income unit above the income limitation applicable under paragraph (1), such unit shall continue to be treated as a low-income unit if the income of such occupants initially met such income limitation, and such unit continues to be rent-restricted.”
The words “such occupants” refer back to the occupants at the time of move-in. The phrase suggests that the 140% test applies to the family as it was defined at the time of move-in, thereby, perhaps unintentionally, denying the threshold for adding other adult family members. This offends the industry at large. In the example above, a change in the interpretation could require that the daughter either opt to place her mother in an assisted facility, or that, should they choose to remain living together, seek other housing. Suddenly, getting married becomes a Sec. 42 eligibility issue; adding a roommate in order to better afford the rent can also take the unit out of its tax credit eligibility.
The impact of such a requirement would make Sec. 42 the first housing program in history (known to the author) that provides no mechanism for changes in family composition over the length of tenancy of the family. Other housing programs have coping mechanisms not available to Sec. 42. Even the Department of Housing and Urban Development’s Sec. 8 program has a procedure for adding family members. If Sec. 42 is required to qualify families in a manner consistent with Sec. 8, are we not well advised to have a provision for these events?
Changes in family composition are common. Unless the industry is provided with a different practical mechanism to allow for these types of ordinary events, tax credit properties may eventually be forced to require families to move out if they are no longer eligible because of a change in family status. If you fear the potential repercussions of this change, you are not alone. The 8823 Guide is technically correct, and you must be prepared to respond to a change if it comes about.
In the meantime, handle additions to the family in the way you have in the past. Your state housing finance agency will advise you of any changes to its policy.
QWe would like to house a security officer in one of our tax credit units. Would he have to pay rent? We would like to give him a free apartment because living on-site for after-hours emergencies would be a requirement.
ATen years ago, the IRS addressed this matter in a private letter ruling; more recently in Revenue Ruling 2004-82. Both suggest that a unit may be set aside as a courtesy officer unit and included in eligible basis if it houses a security officer.
While some of the conditions were outlined in the private letter ruling, the revenue ruling clarified a few points. If you take both of them into consideration together, this is how it looks:
• The individual should be credentialed as a police or security officer.
• There must be an employment relationship or a contractual agreement.
• It should be considered a “full-time” job with a clear description of responsibilities and hours of work.
• One of the requirements of the job should be that the individual is required to live on-site.
• There should be proof of need based on the level of crime in the area.
• Rent should not be charged while the unit is being used for this purpose.
• If the unit is vacated, it should be rented to another full-time staff member or by a qualified low-income family.
Remember that any units of this nature that are to become part of the common area of a building must be applied for through the state housing finance agency. Typically, this is handled at the time the tax credit application is submitted. If you have an existing tax credit community and have not already done so, be sure to contact your state housing finance agency for instructions.
Update on unit transfers
In the process of finalizing TheoPRO’s survey that appeared in last month’s column, we learned of two circumstances in New Mexico in which households that were denied the right to transfer to tax credit units in other buildings filed fair housing claims. Both needed the change in units for reasonable accommodation issues.
Be aware that if the transfer request is a reasonable accommodation in accordance with a fair housing matter, you may need to make exceptions to the tax credit transfer rule in your state. In both cases in New Mexico, the need for reasonable accommodations met the approval of the state housing finance agency and the IRS. The accommodation was made without the need for any further legal intervention.
Our thanks to Matt Archuleta at the New Mexico Mortgage Finance Authority for this information.n
Have you got a compliance question that is keeping you up at night? Contact email@example.com and get it answered. All questions presented in this column and in TheoPRO’s Weekly On-Line Compliance Advisor are real questions, and all are answered by Ruth personally. See www.icomply42.com for more information.