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LIHTC (Tax Credits)
Frequently Asked Questions

1. How long does it take from the date of my application until I find out if I am to receive a commitment for tax credits?
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The time between the date which an application is submitted to NIFA and the date which a determination is to be made as to who will receive a commitment of tax credits may vary. After all submitted applications have been reviewed, NIFA will commence the process of underwriting each development to determine eligibility for tax credits and viability as an affordable housing property during the compliance period. Applications that pass the underwriting process and have the highest scoring will then be presented to NIFA's Board of Directors for consideration at its next scheduled meeting.


2. What happens if my application is denied by NIFA for tax credits during an application round?
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Those applications that either scored insufficient points or did not pass the underwriting process to receive a reservation of tax credits may resubmit an amended application during a subsequent application round, whereby it will once again undergo the full application process. Those applications which are denied tax credits on the basis that they do not qualify under the provisions of Section 42 of the Code may require a more thorough revision or additional analysis on the part of the applicant as to its potential to qualify under the requirements of the Code.


3. Do I need to hire a consultant for the purpose of applying for the tax credits?
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A number of applicants have commissioned the services of consultants, whose primary responsibility is the completion of the application package in order for the development to be considered pursuant to the Rules that are at that time in effect for the tax credit program. Although there are a number of consultants that might provide assistance to a potential tax credit applicant, NIFA does not require that one be used. NIFA is willing to assist a potential applicant in the understanding of the tax credit program and the various requirements that must be met to submit an application.


4. Do I need to hire an independent third party, such as a certified public accountant (CPA) or a tax attorney, when submitting an application?
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As with the case in the previous question, concerning the need for commissioning the assistance of a consultant, it is not believed that the potential applicant must hire a CPA or tax attorney in preparing the application. However, the services of a CPA or tax attorney may be required in the determination as to the requirements of the Code and their relationship to the real estate transaction in question. The use of a CPA will be required at the time of carryover allocation and placement into service, primarily for the purpose of providing NIFA with certain required certifications and audits.


5. When I am calculating the maximum rental rate of the tenants, and I am not paying for electricity (or some other utility) must I estimate the actual monthly utility expense to the tenant in determining the final eligible rental rate?
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The answer is no. The development owner is not responsible for estimating the monthly utility consumption of the tenants in determining the maximum eligible rental rate. The maximum rental rate takes into consideration that not more than 30% of the imputed income limitation may be charged for housing to a prospective low-income tenant. In arriving at this 30%, the development owner must be aware of any utility costs that the tenant will be responsible for paying directly to the service provider. In the case where a tenant is required to pay electricity to the local provider directly, then, pursuant to Code Section 42(g)(2)(B), the development owner must discount the maximum monthly rent by the applicable utility allowance as provided for under Section 8 of the U.S. Housing Act of 1937. These utility allowances may be obtained from the local public housing authority and may change on an annual basis.


6. What happens when I have leased a unit to a Section 8 recipient and the fair market rent paid through the Section 8 program exceeds the maximum rent requirements?
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In the instance where a low-income tenant in a property is receiving housing assistance under Section 8 of the U.S. Housing Act of 1937, and the rent payment made to the development owner exceeds that which is allowed for under Code Section 42(g)(2), the unit will not cease being an affordable housing unit as defined in Section 42. The point of law is found in Code Section 42(g)(2)(B) whereby the gross rent will not include any payments made under the Section 8 program. Consequently, the development owner may receive rental assistance payments in excess of the allowable level and still maintain the unit as rent restricted. However, the development owner must understand that the tenant's contribution towards rent may not exceed that amount that is allowed for under Code Section 42(g)(2).


7. I have completed the rehabilitation of a development in March of 2002 and I would like to be considered for tax credits. Some of the costs that are associated with this rehabilitation were incurred in 2001. May I apply for these tax credits in 2002 even t
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In answering a question of this nature, NIFA would refer to IRS guidance pertaining to the timing for making a tax credit allocation and the time period over which a developer may accumulate basis. According to Code Section 42(h)(1)(B), an allocation of tax credits shall be taken into account only if it is made not later than the close of the calendar year in which the development is placed in service. IRS Advance Notice 88-116 states that under Code Section 42(e)(4)(A), rehabilitation expenditures that are treated as a separate new building are considered placed into service at the close of any 24 month period over which such expenditures are aggregated. Consequently, the costs incurred by the developer in 2001 would be includable in basis and by completing the rehabilitation in 2002, the developer would be eligible for consideration of tax credits during the program year 2002.


8. When would the purchase of an existing building qualify for the acquisition tax credits?
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The most common provisions whereby the purchase of an existing building would qualify for acquisition tax credits are (1) when the seller of the property has had constant ownership of the property in question for a period of at least 10 years, OR (2) when the seller of the property is an insured depository institution in default or a receiver or conservator of such an institution. The RTC qualifies as a receiver or conservator of a defaulted depository institution. It is important to note that in order to receive the benefits of the acquisition credit when purchasing a property from the RTC, the developer must file for a waiver of the 10-Year Rule with the IRS. Only after such determination has been made by the IRS that the 10-Year Rule can be waived will the developer be eligible to receive any final documentation from NIFA concerning the acquisition tax credits. The complete provisions under which the purchase of an existing structure may qualify for acquisition tax credits is provided for in Code Section 42(e).


9. Can an application fee be charged for a prospective Section 42 tenant? If so, does the fee have to be returned after the tenant has been accepted, applied towards a security deposit, or applied towards rent? Or, can the owner keep the fee to cover out-of
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In PLR 9330013, the IRS allowed a development owner to charge a one-time application fee (intended to reimburse the owner for out-of-pocket expenses for credit and reference checks) and not include such fee in the calculation of rent. The IRS did not elaborate on how such a fee should be calculated, but a development owner should estimate the amount of reimbursement necessary to cover costs of processing the application (and applications of rejected applicants if those applicants are not charged separately). The same principal should also apply to deposits.


10. Can a development have additional charges, such as appliance or furniture rent (assuming the costs exceed maximum allowable rent and that the items being rented are not included in eligible basis)? Can they be included on the lease as part of the total re
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Services other than housing will not be considered rent if the services are optional and practical alternatives exist for the tenants (see IRS Regs. Section 1.42-11(a)). Since appliance or furniture rent does not constitute housing, if it is optional, it should not be considered part of rent. Practical alternatives should also be available since the tenants can purchase appliances or furniture, or rent those items from other sources. It is advisable to have a separate lease for appliance or furniture rentals.


11. In a situation where a resident in a qualified household gets married or adds a household member (remaining in the same unit), and this addition causes the income to exceed the published limits, would the unit remain qualified under the 140 Percent Rule o
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The General Explanation to the 1986 Tax Act (Blue Book) contemplates that both an increase in a tenant's income and an adjustment in family size fall within the 140 Percent Rule. Keep in mind, however, that when a tenant initially qualifies, it is the tenant's anticipated income that counts. If the anticipated income is reasonable, the tenant should qualify even though a later change in marital status results in annual income exceeding the qualifying income limits. But if a tenant applies for a unit knowing that annual income will increase due to a later event (in this case, marriage), the tenant's anticipated income may exceed the qualifying income limits even though the tenant would qualify on the application date based on actual income.


12. If a single resident household initially qualifies for a low-income unit, then a year later the tenant becomes a full-time student, is the household ineligible to continue tenancy? Is this unit out of compliance?
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There is no provision in Section 42 which allows a unit to remain qualified if an otherwise qualified tenant becomes a full-time student. Therefore, the unit would be out of compliance.


13. Can the manager's unit float or does it have to be specially designated at the time of application? Can the size of the designated non-revenue producing unit change without affecting allowable credits? Also, can an additional unit be assigned to a second
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The IRS has ruled that a resident manager's unit (Rev. Rul. 92-61) and a maintenance personnel's unit (PLR 9330013) are facilities reasonably required by the development, which means that they are not considered residential rental units. However, such facilities are considered residential rental property. Therefore, the adjusted basis of these units are includable in the building's eligible basis. Rev. Rul. 92-61 does not shut the door to the concept that a unit can float. For tax credit purposes (i.e., calculation of qualified basis) the resident manager's unit is not counted in either the numerator or denominator. If, however, the unit is later converted to a residential rental unit, it would be included in the denominator for the respective year. A conversion should be able to go either way. The size of the unit should not affect calculation of tax credits.

The legislative history of Section 42 states that residential rental property includes other facilities reasonably required by the development. The example provided in Treas. Reg. Section 1.103-8(b)(4)(iii) of facilities reasonably required for a development specifically includes units for resident managers or maintenance personnel. This example does not appear to be all-inclusive, however, and could possibly allow other facilities to be reasonably required by the development. The key is whether additional units (a second resident manager or security officer) are reasonably required. The IRS has also informally indicated that it would look to whether HUD would treat such a unit as a non-residential unit in determining whether additional units are reasonably required for the development. Informal conversations with HUD indicate that it would treat a security officer's unit similar to a resident manager's unit.


14. If the financial arrangement with the manager includes the manager paying some rent on the unit, does this change the character of the unit? If other common space is producing income (for example, the lounge in a senior development rented out for special
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If the manager's unit is determined to be a facility which is reasonably required for the development (i.e., it is not a residential rental unit), then it should not matter whether the manager paid rent or not, as long as any payment is essentially meant to defer part of the cost of the unit, rather than provide profits to the owner. The same general rules should also be applicable to other common space. If the income is in the form of a fee which is intended to defer part of the cost (such as a fee for using the clubhouse, which cover the cost of cleanup etc.), it should not affect eligible basis. If income is truly "profit," then the facility may be considered commercial (such as the kitchen which provides meals for a congregate facility) and the facility's adjusted basis may not be included in eligible basis.


15. We have a property in the last year of the federal 15-year compliance period. What does this mean and how do we know when we can really stop complying with Section 42?
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The federal 15-year period ends in the last month of the 15th taxable year. Some owners believe that if they placed a building in service in June of a taxable year, compliance should be able to terminate in June of the 15th year. This is incorrect.

If an owner began the credit period in June of a given year, they claimed credits for the balance of that taxable year (or in this example, June through December). Subsequently, the building must be compliant through the end of the 15th taxable year also. So, hold on to compliance practices through the very end of the 15th year.

Secondly, while the federal compliance period ends at this time, whether or not the property must comply any longer depends largely on its allocation year. Allocations after January 1, 1990 carry an ‘extended use’ commitment, typically for an additional 15 years. While the IRS is no longer involved and credits beyond the initial 15 years are not subject to IRS recapture, NIFA will have the responsibility for on-going compliance practices.


16. Does the Lead Safe Housing Rule apply to the Internal Revenue Service's Low-Income Housing Credit Program?
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Yes, when the HUD Uniform Physical Conditions Standards (UPCS) are used by the state housing credit agency to monitor for compliance in the low-income housing credit program. (The Lead Safe Housing Rule is part of the UPCS [24 CFR 5.703(f)]. The IRS' monirtoring regulation became effective January 1, 2001 [26 CFR 1.42-5(d)(2)(ii)].)


17. Can common areas be used extensively by nonresidents; and can owners charge for the use of common areas?
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No in both cases. Common areas cannot be used extensively by nonresidents, and must be used primarily by residents. Owners cannot charge for the use of common areas, but can charge for services provided in common areas. However, if the common area qualifies as a community service facility, then the area can be used extensively by nonresidents; and owners can charge for the use of the area.

Community Service Facility
Internal Revenue Code (IRC) §42(d)(4)(C) outlines the requirements of a community service facility. For amounts to be included in the eligible basis for the purpose of providing a community service facility, the area must meet the following requirements:

1. The facility must be in a qualified census tract (QCT);
2. The facility must be used to provide services that will improve the quality of life for the community residents whose income is 60 percent or less of the area median income (AMI); and
3. The facility’s adjusted basis may not exceed 10 percent of the eligible basis of the qualified low-income housing project.

Additional requirements beyond those in IRC §42(d)(4)(C) outlined above are found in Revenue Ruling 2003-77 as follows:

1. The taxpayer must demonstrate that the services provided at the facility will be appropriate and helpful to individuals in the area whose income is 60 percent or less of AMI;
2. The facility must be located on the same tract of land as the one used for the project; and
3. If fees are charged for services, they must be affordable to individuals whose income is 60 percent or less of AMI.

Common Area
For a project that does not satisfy the requirements for a community service facility, the taxpayer may still be able to include the costs of the common area in eligible basis if it satisfies the requirements under IRC §42(d)(4)(B) for common areas that are provided as comparable amenities to all residential units. Additional guidance regarding whether costs associated with common area of the property can be included in eligible basis is found in Private Letter Ruling 9822026 as follows:

1. The common area must be a commensurately sized facility used principally by the project residents;
2. The common area may be used by nonresidents although the property residents would have priority for services; and
3. Fees for the services provided with these facilities may be charged while the use of the facility must be free to the tenants.

Differences Between a Community Service Facility and a Common Area
The main difference between a common area, as defined in IRC §42(d)(4)(B), and a community service facility, as defined in IRC §42(d)(4)(C), is the following:

1. A community service facility must be in a QCT in order to be included in eligible basis;
2. A community service facility may be used by people living outside the property, although it must be targeted toward individuals whose income is 60 percent or less of AMI;
3. Any fees charged for services provided in the community service facility must be affordable to individuals whose income is 60 percent or less of AMI; and
4. The community service facility must demonstrate that the services provided at the facility will be appropriate and helpful to individuals in the area whose income is 60 percent or less of AMI.

Although the tenants or third-party providers of services generally should not be charged for the use of common areas, except for services provided and maintenance fees, it may be possible to charge tenants or third-party providers for the use of community service facilities. In other words, charging for services provided in a common area or community service facility generally does not disqualify the eligible basis, but charging for the use of a common area or community service facility will disqualify a common area but not disqualify a community service facility.





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