The Internal Revenue Service (IRS) has clarified that tax-exempt private-activity bonds can be used to finance affordable housing developments for veterans, farmworkers, and other populations.

The guidance became necessary after IRS officials indicated that such housing was potentially a violation of the general public-use requirements in bond regulations last year.

This created an issue even though multifamily housing bonds and the 4% low-income housing tax credit (LIHTC) have been widely used together to develop housing for people with special needs.

“It was concerning because people want to do affordable housing for veterans and for specific groups, and a lot of these projects are done with LIHTCs and bonds,” says Vicky Tsilas, a partner at the Ballard Spahr law firm. “People really wanted that clarification.”

The new guidance is good news for the affordable housing industry.

“It clarifies that a project with credits and bonds doesn’t fail to meet the bond rules if there’s a special preference as permitted under the tax credit rules,” Tsilas says.

The recent reinterpretation of the bond rules was preventing shovel-ready housing developments for veterans from moving ahead, according to Rep. Mike Thompson of California, House Ways and Means Select Revenue Measures Subcommittee chairman.

He and other members of Congress as well as affordable housing industry groups pressed IRS officials to resolve the issue.

Many people in the industry were asking for this ruling to help link Sec. 142 with Sec. 42 on this issue, says Tim Anderson, a partner at the RubinBrown accounting and consulting firm who works with developers on LIHTC projects.

Sec. 42 of the Internal Revenue Code allows housing credit properties to have preferences for veterans and other special groups. However, the tax-exempt bond rules under Sec. 142 did not contain the same provisions.

“Now this guidance marries those together and says yes you can build homes for veterans and qualify for the credit and still take advantage of tax-exempt bond financing that’s available,” Anderson says.