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IRS Guidance on Average Income AMI Calculations
On Jan. 30, the Internal Revenue Service (IRS) released Revenue Ruling 2020-4 addressing the average income (AI) minimum set-aside. The ruling resolves what had been an uncertainty: how to set limits for the 20, 30, 40, 70 and 80 percent designations.
As was widely anticipated by low-income housing tax credit (LIHTC) professionals, the approach will be the same as applies to 60 percent area median income (AMI) limits.
The U.S. Department of Housing and Urban Development (HUD) annually publishes two sets of limits:
1. Section 8, for HUD's assisted housing programs, and
2. Multifamily tax subsidy projects (MTSP) income limits for LIHTC qualification levels and maximum housing expenses.
Following federal law and past IRS guidance, the MTSP starts with HUD’s Section 8 “very low income” (VLI) figure of 50 percent AMI and sets the 60 percent limits as households with incomes at 120 percent of VLI.
Rev. Rul. 20-04 says, “Congress did not indicate that a different HUD income level calculation category should be used,” therefore the IRS simply expands the current practice:
- 20 percent AMI is 40 percent of VLI
- 30 percent AMI is 60 percent of VLI
- 40 percent AMI is 80 percent of VLI
- 70 percent AMI is 140 percent of VLI
- 80 percent AMI is 160 percent of VLI
Other HUD Limits
A possibility for confusion stems from HUD’s other non-MTSP limits, “low income” (LI) and “extremely low income” (ELI), which apply to various appropriations programs (e.g., Housing Trust Fund). A common mistake is thinking these two amounts are the same as 80 percent and 30 percent of AMI, respectively. In fact, federal law requires HUD to make multiple adjustments to each. As a result, ELI exceeds 30 percent in many jurisdictions (LI is varied).
The IRS is aware of these adjustments; the ruling describes them as “irrelevant” to what matters for LIHTC limits.
Novogradac Rent & Income Limit Calculator ©
Soon after AI became law, Novogradac made the limits available in its free, online calculator. The images below show income limits for the Raleigh, N.C. metropolitan statistical area (Wake County):
Protection for Existing Properties
An important reality is AI buildings have placed in service before the guidance came out. Although LIHTC professionals generally knew what the IRS would adopt (as noted above), there is a possibility some properties are using what are now the wrong amounts. For instance, either HUD’s LI or ELI limits instead of 80 or 30 percent. For example, in an area where ELI is greater than 30 percent a property manager may have moved in a tenant to a 30 percent designated unit that will not meet the 30 percent limit based on the guidance in Rev. Rul. 20-04. Under normal circumstances, a tenant’s income being greater than the applicable limit at move in results in noncompliance, which is particularly problematic during lease-up.
Fortunately, Rev. Rul. 20-4 allows such units to continue to count as qualified, under certain conditions. Specifically, the developer must have “unambiguously” indicated in the “request for an allocation” (i.e., application) both
- an intent to elect AI, and
- a reasonable expectation for “a specific dollar amount” greater than the “designated imputed income limitation” determined under the ruling.
Meeting the criteria above means the limits for the duration of the compliance period for such units are “not less than” the reasonably expected amount indicated in the allocation request to the agency. For example, if ELI was $30,000 at the time of application and the calculated limit is $25,000, the property would continue to use $30,000 for both qualifying tenants and setting the maximum housing expense. However, the property would not be eligible to implement any future increases in ELI but rather would use $30,000 until the calculated limit exceeded this amount, and then would use the calculated amount going forward.
Based on the example below, the property would use $30,000 until 2024 when the calculated amount exceeds the safe-harbor amount:
This allowance is available only to properties with an allocation before the ruling’s publication date. The IRS does not say whether use of LI or ELI instead of 80 or 30 percent is reasonable, thereby potentially creating another uncertainty. In addition, it is likely applications submitted prior to March 23, 2018 or before the agency updated its application for the AI minimum set-aside would not be eligible for this safe harbor, because the developer would not have been able to indicate an intention.
No doubt there are very few (if any) properties operating under the wrong limits. In those circumstances, owners should carefully analyze eligibility to maintain the higher amounts and contact the LIHTC allocating agency. Transitioning the units into following the correct maximums may make sense if financial feasible.
While Rev. Rul. 20-04 very helpfully resolves a crucial matter, there are others not addressed. Examples include what it means to “designate” a unit and operation of the next available unit rule. Whether the IRS will issue any further guidance is unknown.