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How Hurricane Matthew Disaster Declaration Affects LIHTC Developments
President Barack Obama and the Federal Emergency Management Agency (FEMA) declared parts of Florida, North Carolina and Georgia, and South Carolina as major disaster areas related to Hurricane Matthew, which killed at least 36 people and caused billions of dollars in damage for its five-day pounding of the Southeast United States.
The major disaster declaration is significant since it makes low-income housing tax credit (LIHTC) and tax-exempt, bond-financed multifamily rental housing properties in these areas eligible for relief from certain provisions under the Internal Revenue Code (IRC) 42 and 142.
The Internal Revenue Service’s (IRS’s) Revenue Procedures 2014-49 and 2014-50 provide guidance on temporary relief from certain requirements of IRC Section 42 and Section 142, respectively, in the context of a major disaster.
Revenue Procedure 2014-49
Rev. Proc. 2014-49 provides temporary relief from certain requirements of IRC Section 42 for agencies and owners as well as emergency housing relief for individuals displaced by a major disaster. When the president issues a declaration of a major disaster (as President Obama has done in Florida, Georgia and North Carolina), FEMA may designate particular cities, counties or other local jurisdictions covered by the declaration as eligible for assistance under Rev. Proc. 2014-49.
Rev. Proc. 2014-49 modified the previous disaster relief guidance in Rev.Proc. 2007-54. Among the changes, it modified the reasonable restoration period for recapture relief. Also, in determining if there will be loss of credits, Rev. Proc. 2014-49 refers to the building’s qualified basis at the end of the taxable year immediately preceding the first day of the incident period as determined by FEMA, rather than the president’s major disaster declaration.
Rev, Proc. 2014-49 relief in disaster areas includes:
- temporary suspension of certain income limitations for displaced individuals;
- eliminating the need for self-certification of income eligibility;
- permitting an LIHTC allocating agency to allow a property owner to provide emergency housing relief to displaced individuals from other jurisdictions;
- describing the consequences of providing emergency housing relief during and after the first year of the credit period; and
- modifying the safe harbor relating to the amount of credit allowable to a restored building.
Relief for Carryover Allocation, Placed in Service Requirements
Rev. Proc. 2014-49 provides relief for carryover allocation and placed-in-service requirements. If a LIHTC property owner has a carryover allocation for a building located in a major disaster area and the incident period for the major disaster began before the 10 percent deadline in IRC Section 42(h)(1)(E), the allocating agency may grant the owner an extension to meeting the 10 percent requirement. If such an extension is granted, the 10 percent requirement will be deemed satisfied if the property owner incurs more than 10 percent of the reasonably expected basis no later than the expiration of that extension.
If the incident period for a major disaster occurred on or after the date of the carryover allocation, the state housing agency may grant an extension to the two-year placed-in-service period. The IRS will treat the LIHTC property owner as having satisfied the placed-in-service requirement if the owner places the building in service no later than the expiration of that extension.
Depending on the extent of damage in a major disaster area, a state housing agency may make this determination on an individual project basis or determine that all owners or a group of owners in the major disaster area warrant the above relief.
Rev. Proc. 2014-49 also provides guidance regarding tax credit recapture relief. Under Section 42(j)(4)(E), if a building’s qualified basis is reduced by reason of a casualty loss, it is not subject to recapture of credits to the extent the loss is restored by reconstruction or replacement within a reasonable restoration period. However, if the basis is reduced because of a major disaster in a declared major disaster area, there is no recapture of credits as well as no loss of credits if the loss is restored by reconstruction or replacement within a reasonable restoration period. The allocating agency will determine the reasonable restoration period in the case of a major disaster that causes a reduction in qualified basis. Under Rev. Proc. 2014-49, the reasonable restoration period must not extend beyond the end of the 25th month following the close of the month of the major disaster incident period declaration–in this case, November 2018. The credit amount allowable during the reasonable restoration period is measured using the building’s qualified basis at the end of the taxable year immediately preceding the first day of the incident period for the major disaster.
For buildings in the first year of the credit period, a state housing agency has the discretion to treat the allocation as a returned credit or may toll the beginning of the first year of the credit period. The tolling period may not extend beyond the end of the 25th month following the close of the month of the incident period of the disaster. Property owners may not claim any LIHTC during the restoration period of these first-year buildings.
Credits for Rehabilitation Expenditures
A LIHTC property owner may receive an additional amount of credits for rehabilitation expenditures if those expenditures are used for rehabilitation and not for restoring qualified basis. A taxpayer may treat as rehabilitation expenditures any expenditures described in Section 42(e)(2) that exceed the amount expended for restoration. However, if a major disaster causes a reduction in qualified basis, the property owner may alternatively treat as restoration expenditures the amount of:
- the building’s eligible basis immediately before the major disaster, multiplied by
- the excess, if any, of
- 1 over
- The fraction whose numerator is the building’s post-major disaster qualified basis and whose denominator is the building’s pre-major disaster qualified basis.
Protection for Existing Tenants
Another provision of Rev. Proc. 2014-49 is emergency housing relief. LIHTC property owners who have obtained written approval from the agency to house displaced individuals may do so for a period not longer than 12 months from the end of the month in which the major disaster incident period starts.
Protection is provided to existing LIHTC property tenants, who cannot be evicted solely to provide emergency housing relief for a displaced individual. The LIHTC property owner has to keep detailed records for the displaced individuals and cannot charge gross rents higher than the maximum LIHTC gross rents for those units. Further, if a displaced individual begins occupancy of a unit at a time that is within the temporary housing period and the first year of the credit period, then the unit is treated as a low-income unit during the temporary housing period
The emergency housing of displaced individuals in low-income units during the temporary housing period does not cause the building to suffer a reduction in qualified basis which would cause recapture or loss of LIHTCs.
Certifying Displaced Tenants
Although displaced tenants will continue to considered qualified tenant during the 12-month period following the start of the incident period–after this period they will no longer be considered income qualified unless an initial certification is performed. Therefore, many owners will chose to income certify the temporarily displaced households so that they can remain in the units for longer than 12 months and not jeopardize the project’s LIHTC.
Revenue Procedure 2014-50
Rev. Proc. 2014-50 provides temporary relief from certain requirements of IRC Section 142(d) for issuers and operators of qualified residential rental properties financed with tax-exempt bonds. If a property owner obtains written approval to house displaced individuals, they may do so for a period not exceeding 12 months from the end of the month of the start of the incident period for major disaster. Protection is provided to existing tenants from being evicted solely to house a displaced individual.
If a displaced individual has demonstrated low-income qualification, the operator may accept the individual either as a low-income tenant or as a displaced individual. If a displaced individual has not demonstrated low-income qualification and the operator wishes to accept the individual as a tenant, the individual would be treated either as not low-income or as receiving emergency housing relief as a displaced individual.
Rev. Proc. 2014-50 further provides that the income of a displaced individual during the temporary housing period is disregarded and does not change the status of the unit. If a displaced individual takes occupancy of a unit in a bond/LIHTC project during the first year of the credit period, the unit is treated as occupied by a low-income individual. If a displaced individual continues to occupy a unit at the end of the temporary housing period, then the status of the unit and the income of the individual are re-evaluated as though the individual commenced occupancy the day immediately following the end of the temporary housing period.
Under both Rev. Proc. 2014-49 and Rev. Proc. 2914-50, property owners and managers must maintain records, including the name, address, and Social Security number of each displaced individual, as well as a displacement statement.
While this updated guidance is helpful and provides additional clarity, disaster relief often involves complex circumstances. As such, if you find yourself in such a situation, you are encouraged to contact a Novogradac professional about the consequences of providing housing to displaced individuals before doing so with your LIHTC property.