What You Need to Know about LIHTC Disaster Relief – 2017 Hurricane Season Edition
At the time of this writing, 39 counties in Texas have been declared major disaster areas as a result of Hurricane Harvey. There are approximately 670 low-income housing tax credit (LIHTC) properties with approximately 89,900 units in these areas, according to estimates from the Texas Department of Housing and Community Affairs (TDHCA) and the U.S. Department of Housing and Urban Development (HUD). Meanwhile, Floridians are anxiously monitoring Hurricane Irma’s path as the Category 5 storm heads west.
An earlier discussion explained how LIHTC properties can provide emergency housing relief for displaced households. However, beyond their concern for serving displaced households, LIHTC property owners, investors and developers also are concerned about effects of the disaster on the development and operation of their properties located in major disaster areas. These concerns include:
- Meeting the 10 percent test,
- Satisfying the placement in service requirement,
- Avoiding recapture of previously claimed LIHTCs,
- Continuing to claim LIHTCs,
- Leasing up by the end of the first year of the credit period, and
- Funding any necessary rehabilitation costs.
The good news, as noted earlier in this space, is that Revenue Procedures 2014-49 and 2014-50, provide LIHTC and tax-exempt bond financed rental housing properties located in presidentially declared disaster areas temporary relief from numerous LIHTC compliance requirements.
Note: This overview is not a substitute for reading the revenue procedures, understanding directions from LIHTC allocating agencies and seeking advice from your Novogradac or other tax professionals.
10 Percent Test and Placed in Service Extensions
For LIHTC properties with 10 percent test deadlines after the disaster started, LIHTC allocating agencies may allow up to an additional six months to meet the 10 percent test.
If the major disaster occurred after the carryover allocation, the allocating agency also may grant up to a one year extension to the placed in service requirement.
Agencies may make either determination on an individual property by property basis or for or all those in the affected areas. In all cases owners should maintain documentation of the extension.
Internal Revenue Code (IRC) Section 42 allows LIHTC property owners to avoid tax credit recapture from a casualty loss by reconstructing or replacing such losses within a reasonable period. Under Rev. Proc. 2014-49, the allocating agency must determine a reasonable restoration period, which may extend up to the 25th month following the close of the month of the presidential declaration. The amount of LIHTC allowable during the restoration period is measured using the qualified basis at the end of the taxable year immediately preceding the first day the disaster began. That said, LIHTC property owners must report all reductions in qualified basis to the allocating agency regardless of eligibility for regulatory relief.
When LIHTC buildings are severely damaged, destroyed or rendered uninhabitable by the disaster during the first year of the LIHTC period, the agency has the discretion to:
- treat the allocation as returned, or
- toll the beginning of the first year.
If the agency chooses to toll the start of the first year, the tolling period may not extend beyond the end of the 25th month following the close of the month of the declaration. Property owners may not claim any LIHTC during the restoration period of first-year buildings.
LIHTCs for Rehabilitation Expenditures
Building owners are not eligible to claim LIHTCs on costs incurred to restore qualified basis. However, an allocating agency may make an additional allocation of LIHTCs for rehabilitation expenditures (as described in IRC Section 42(e)(2)), if those expenditures are for rehabilitation and not for restoring qualified basis. The amount treated as restoring qualified basis is generally determined under all of the relevant facts and circumstances. Fortunately, when a disaster causes a reduction in qualified basis, LIHTC property owners may elect to use a restoration expenditure safe harbor. The safe harbor expenditure amount equals the property’s eligible basis times the percentage reduction in qualified basis.
Novogradac & Company is monitoring state and federal response to Hurricane Harvey and posting updates to the Hurricane Harvey - Response and Guidance page. Novogradac professionals are also available to answer questions about how major disasters, casualty losses or Revenue Procedures 2014-49 and 2014-50 might affect your LIHTC properties.