LIHTC Working Group: Legislative/Regulatory Updates for 2019-2020

Published by Scot Keller on Wednesday, December 4, 2019
Journal cover thumb December 2019

During 2019, the Low-Income Housing Tax Credit (LIHTC) Working Group focused its efforts on a number of legislative and regulatory items that the group identified as warranting attention.

Below is a summary of the issues that the LIHTC Working Group addressed in 2019, as well as an action item that the group plans to address for 2020.

Proposed Treasury Regulations under Internal Revenue Code Section 163(j)

On Feb. 26, 2019, the LIHTC Working Group submitted a comment letter to the Internal Revenue Service (IRS) offering comments on the proposed Treasury Regulations under Internal Revenue Code (IRC) Section 163(j), “Limitation on Business Interest” (Proposed Regulations).

In its letter to the IRS, the LIHTC Working Group commented on Proposed Regulations Section 1.163(j)-6(i), which is currently reserved to address tiered partnership and S corporation structures. The group noted that there is not clear language in IRC Section 163(j) as to whether an upper-tier partnership that is the limited partner of a partnership can make the real property trade or business (RPTOB) election. The LIHTC Working Group requested guidance from the IRS in terms of whether a partnership that is a partner in a tiered partnership can make the RPTOB election and the mechanism by which the election should be made.

The LIHTC Working Group also noted that Proposed Regulations Section 1.163(j)-6(m) is silent regarding the treatment of excess business interest expense for a taxpayer that makes the RPTOB election in a later tax year. The group requested that prior years’ excess business interest expense allocable from a partnership electing to be a RPTOB in a later year to be treated as paid or accrued by the partnership’s partners in such succeeding taxable year, and not be subject to the business interest expense deduction limitation.

Lastly, the LIHTC Working Group addressed Proposed Regulations Section 1.163(j)-9(h), which prohibits the RPTOB election from being made in a scenario when at least 80 percent of the fair market value of a business’ real property is leased to a trade or business under common control (i.e., 50 percent common ownership). The group requested that a “master lease” structure be treated as eligible for the RPTOB election. This will allow a LIHTC landlord partnership to avoid the business interest expense deduction limitation in a “master lease” structure, which is used at times when the LIHTC is paired with the historic rehabilitation tax credit.

HUD’s LIHTC Data Collection Forms

On April 12, 2019, the LIHTC Working Group submitted a comment letter to the U.S. Department of Housing and Urban Development (HUD) regarding HUD’s proposed revisions to its LIHTC Data Collection Form and LIHTC Tenant Data Form.

The LIHTC Working Group expressed its support for HUD’s proposed additions of a resyndication field, a scattered-site indicator and the question, “Why is this property no longer monitored for LIHTC compliance?” in the LIHTC Data Collection Form. Additionally, the group provided recommendations for further changes beyond what was proposed by HUD. These include a field that requires the total length of a property’s affordability restrictions; a question that addresses whether a property has waived its right to a qualified contract under IRC Section 42(h)(6)(F); a field to specify the rent levels of units set aside with rents below the property’s elected rent/income ceiling; a question on whether a LIHTC property is part of HUD’s Rental Assistance Demonstration program; and a question on whether a LIHTC property has received Housing Trust Fund financing.

2019-2020 Priority Guidance Plan

The LIHTC Working Group June 7, 2019, provided a comment letter to the IRS that addressed four action items to be included in the IRS’ 2019-2020 Priority Guidance Plan.

In its letter, the group requested guidance under IRC Section 163(j) regarding the treatment of business interest expense in multi-tiered partnership structures, as discussed in more detail above in the “Proposed Treasury Regulations under Internal Revenue Code Section 163(j)” section of this article.

The LIHTC Working Group also requested guidance under IRC Section 42 for the recently implemented average income minimum set-aside election. Beyond the inclusion of the election on the revised edition of IRS Form 8609, Low-Income Housing Credit Allocation and Certification, there has been no further guidance from the IRS on some specific mechanics of the average income test. For example, clarification is still needed on determining the next available unit designation in which more than one tenant in units of differing income level designations become over-income simultaneously.

The third item on which the group requested guidance in its comment letter relates to LIHTC properties that suffer a casualty loss in an area that is not a federally declared disaster area. As discussed in more detail below, the LIHTC Working Group requested casualty loss relief for LIHTC properties not in a presidentially declared disaster area in a manner similar to the relief offered in Revenue Procedure 2014-49.

Lastly, the LIHTC Working Group requested guidance concerning the exception rule under IRC Section 42(d)(6) for any federally or state assisted building. This item was originally on the IRS’ Priority Guidance Plan for 2015-2016, but was it was not addressed during the plan year, and was subsequently removed from future Priority Guidance Plans.

Revenue Procedure 2014-49 and LIHTC Disaster Relief

On Sept. 30, 2019, the LIHTC Working Group issued a letter to the IRS regarding Revenue Procedure 2014-49, which provides relief from LIHTC compliance in presidentially declared major disaster areas. In its letter, the group argued that casualty losses, such as a fire or flooding, are by their very nature beyond the control of LIHTC property owners, including the timing of such events, and that each of the relief measures detailed below should be provided for all LIHTC properties that suffer a casualty loss, regardless of whether a property is located in a presidentially declared disaster area.

Revenue Procedure 2014-49 grants relief for a LIHTC property owner that has a carryover allocation for a building in a presidentially declared disaster area. In a situation in which the casualty event occurred before the carryover allocation deadline, a state LIHTC allocating agency can grant an owner an extension to meet the 10 percent test requirement. Furthermore, if the casualty event occurred on or after the date of the carryover allocation, an allocating agency can grant an owner an extension for the placed in service requirement.

Additionally, Revenue Procedure 2014-49 states that if a LIHTC property is damaged by a casualty event in a presidentially declared disaster area, and the building was restored in a reasonable period of time (i.e., no more than 24 months from the end of the year the area was declared a disaster area), then such property will not face recapture or lose tax credits during the reasonable period of time while the property is restored.

Another item of relief provided by Revenue Procedure 2014-49 grants state LIHTC allocating agencies the ability to extend dates for scheduled compliance reviews in order to give property owners time to correct physical deficiencies before physical inspections by the allocating agencies.

Lastly, for LIHTC buildings in the first year of the tax credit period that are severely damaged or destroyed in a presidentially declared disaster, Revenue Procedure 2014-49 grants allocating agencies the ability to toll the beginning of the first year of the tax credit period through no later than the end of the 25th month following the close of the month of the disaster declaration.

For each of these four relief measures, the LIHTC Work Group noted that contrary and inequitable results are created for LIHTC properties not located in declared disaster areas. The group’s focus was on the uncontrollable nature and timing of casualty events, and for that reason, temporary casualty relief should be extended to all LIHTC properties.

Looking Ahead: The Average Income Test

As discussed above in the 2019-2020 Priority Guidance Plan section of this article, further guidance is still needed on the practical implementation of the average income test. The LIHTC Working Group is working on a draft comment letter to submit in 2020 to the IRS and the U.S. Department of Treasury that would provide recommendations and request guidance on the average income test minimum set-aside election.

In its proposed letter, the LIHTC Working Group will request guidance on property compliance with the new set-aside; guidance and recommendations on the process for making initial unit designations; guidance and recommendations on changes to unit designations; guidance on meeting and maintaining the 60 percent average area median income for a property; and guidance and recommendations on the application of the next-available-unit rule.

If you are an investor, developer, syndicator or LIHTC  professional and would like to be part of our group and get the inside track on issues affecting the LIHTC, or you have technical program issues that need resolved, join the LIHTC Working Group and add your issues to the agenda. For more information about becoming a member, please email [email protected].