HUD Clarifies and Expands Cap on Income Limits

Published by Thomas Stagg on Wednesday, January 17, 2024 - 10:17AM

The U.S. Department of Housing and Urban Development (HUD) issued a notice Jan. 10 on the changes in methodology used in calculating the cap component of income limits. When calculating income limits for low-income housing tax credit (LIHTC) and tax-exempt bond properties (referred to by HUD as multifamily tax subsidy projects (MTSP)), HUD applies adjustments to area median income. One of the adjustments is a cap on year-over-year increase. The notice did two things: clarified the national median income portion of the cap and set a ceiling at 10% on increases. 

CAP Background

When HUD discontinued its hold harmless policy, a cap on year-over-year income limit increases and a floor on year-over-year income limit decreases were put into place. The cap on income limits was the greater of 5% or two times the change in national median income.

For a discussion on how the cap has historically been calculated, how the notice clarifies the calculation of rent and income limits, and the possible effects of the decision as well as future dates to circle on the calendar, listen to the Jan. 16 episode of the Tax Credit Tuesday Podcast.

National Median Income 

National median Income is one of the components of calculating the cap on income limit increases. In the notice, HUD stated that going forward it will use the most recent American Community Survey (ACS) data when calculating the HUD national median income component of the cap. For 2024 income limits, this means the cap will be based on the change in ACS median income from 2021 to 2022, as these are the two most recent available ACS datasets. 

For 2024, this means the cap based on ACS would be nearly 14.8%. However, as discussed in the next section, this will be further limited by the 10% ceiling.

10% Ceiling

The big change from this notice was the implementation of a hard ceiling of 10% on the cap. Going forward, increases in income limits for any given area will not be allowed to exceed 10%. With 2024 as an example, as noted above, the change in national median income is nearly 14.8%. However, income limits will not be allowed to increase more than 10% in 2024. 

To go one step further, if an area had an income limit of $50,000 in 2023, and the underlying data showed that the incomes had risen by 14.8% to $57,400, then the area would be limited to $55,000. For a LIHTC and tax-exempt property where rent limits are based on the income limits for the area, the rent limits for a two-bedroom apartment in this area would be capped at $1,237 (10% cap) as opposed to the uncapped amount of $1,291 (14.8%).

Impact of the Ceiling

In years where income limits would have grown by greater than 10%, the ceiling will have the following impacts:

The ceiling will benefit existing tenants living in LIHTC developments as they know that their rent limit cannot increase by more than 10% in any given year.

The ceiling will potentially harm prospective tenants at the top end of the income bands as the income limits to qualify for affordable housing will be lower.

The ceiling will harm LIHTC developments under construction as they will not be able to support as much debt.

The ceiling may result in lower income to LIHTC developments with vacant units in markets that max rents are achievable as owners would be able to raise the rent on vacant apartments to the max.

HERA Special Income Limits

HERA special income limits have a unique calculation described in Internal Revenue Code Section 42, and therefore, are exempt from the cap on income limits. HERA special income limits will continue to increase greater than 10% when the underlying income data allows.

Request for Comment

HUD has requested comments due Feb 8 on the impact of the cap and various other questions, many of which impact LIHTC developments. Please read the companion blog post for more information.

The Income Limits Working Group is planning to submit public comment. To join the working group, click here

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