The Internal Revenue Service has issued guidance on how to compute the income limits in the new income-average option for low-income housing tax credit (LIHTC) properties.

Rev. Rul. 2020-4 concludes that the Department of Housing and Urban Development’s (HUD’s) limits for very low-income families should be used to determine the income limits under the income-average, or average-income, option.

Now that guidance has been issued, it may be the start of more developers choosing to use the new provision, which was established under the Consolidated Appropriations Act of 2018.

In general, income averaging allows LIHTC-qualified units to serve households earning as much as 80% of the area median gross income (AMGI). At least 40% of the units have to be both rent restricted and occupied by tenants whose “incomes do not exceed the imputed income limitation designated by the taxpayer.” The designated imputed income limitation of any unit must be 20%, 30%, 40%, 50%, 60%, 70% or 80% of the AMGI.

However, the overall average income limit at the property must not exceed 60% of the AMGI.

This option joined the program’s longtime 20-50 test, in which at least 20% of the units in a property must be occupied by tenants earning no more than 50% of the AMGI, and the 40-60 test, in which at least 40% of the units must be occupied by residents earning no more than 60% of the AMGI. HUD has published incomes for only these original set-asides.

Rev. Rule 2020-4 holds that HUD’s very low-income calculation, as adjusted by family size and consistent with earlier methods, is to be used as the basis for determining the full range of income limits under the average-income set-aside. This carries out the current practice.

For the average income test under the program, the 20%, 30%, 40%, 50%, 60%, 70%, and 80% of AMGI income limitations must be calculated as follows:

· 20% limit: 40% or less of the income limit for a very low-income family of the same size;· 30% limit: 60% or less of the income limit for a very low-income family of the same size;
· 40% limit: 80% or less of the income limit for a very low-income family of the same size;
· 50% limit: equal to or less than the income limit for a very low-income family of the same-size.
· 60% limit: 120% or less of the income limit for a very low-income family of the same size..
· 70% limit: 140% or less of the income limit for a very low-income family of the same size; and
· 80% limit: 160% or less of the income limit for a very low-income family of the same size.

For more details, here is a link to the IRS guidance.