President Trump signed the Consolidated Appropriations Act (“Act”) on March 23, 2018; a $1.3 trillion spending bill that funds the federal government through September 30, 2018. Along with a fix for the so-called “grain glitch” (please click here for the Sikich article on the grain glitch) and a large number of technical corrections, the Act contains provisions that increase the low-income housing credit state housing credit ceiling for calendar years 2018 to 2021 and creates a new category, known as the “average income test,” under which projects can qualify for the credit.
The low-income housing credit is claimed over a 10-year credit period, after the low-income building is placed in service. The amount of the credit for any taxable year is based on the applicable percentage of the qualified basis of each eligible low-income building.
Low-income housing credits are allocated to state housing agencies in proportion to their population. The current year state dollar amount of the ceiling in any calendar year is determined based on the greater of $1.75 multiplied by the state population, or $2,000,000 as indexed for inflation. For calendar year 2018, the amounts are $2.40 and $2,760,000.
To be eligible for the low-income housing credit, a qualified low-income building must be part of a qualified low-income housing project—defined as a project that satisfies one of two tests at the election of the taxpayer:
- 20% or more of the residential units in the project are both rent-restricted and occupied by individuals whose income is 50% or less of area median gross income (the “20-50 test”)
- 40% or more of the residential units in the project are both rent-restricted and occupied by individuals whose income is 60% or less of area median gross income (the “40-60 test”).
Generally, when the income of the occupants of a low-income unit rises above the income limitation, the unit continues to be treated as a low-income unit if the income of the occupants initially was within the limitation and the unit continues to be rent restricted. However, if the income of a unit’s occupants rises above 140% of the income limitation, the unit will lose its low-income status if any residential unit of a smaller or comparable size in the building is occupied by a new resident whose income exceeds the income limitation.
A deep rent skewed project is classified as having 15% or more of the low-income units in the project occupied by individuals whose incomes are 40% or less of the area median gross income. Additionally, the gross rent with respect to each low-income unit in the project cannot exceed 30% of the applicable income limit. The gross rent, with respect to each low-income unit in the project, cannot exceed half of the average gross rent with respect to units of comparable size that are occupied by individuals who do not meet the applicable income limit. A deep rent skewed project will lose low-income unit status if the income of the occupants of the unit increases above 170% of the income limitation and if any low-income unit in the building is occupied by a new resident whose income exceeds 40% of the area median gross income.
Changes Under the Act
The Act provides an increase in the state housing credit ceiling for the years 2018 to 2021. For each of those calendar years, the dollar amounts in effect for determining the current-year ceiling (after any increase due to the applicable cost of living adjustment) are increased by multiplying the dollar amounts for that year by 1.125. The increase in the ceiling will provide a considerable number of needed affordable housing units throughout the country. This provision is effective for calendar years beginning after December 31, 2017 and before January 1, 2022.
A third test was added under the Act for a project to qualify as a low-income housing project. The average income test applies if 40% or more (25% or more in the case of a project located in a high cost housing area) of the residential units in such project are both rent-restricted and occupied by individuals whose income does not exceed the imputed income limitation designated by the taxpayer with regard to the respective unit.
The taxpayer designates the imputed income limitation for each unit. The imputed income limitation is determined in 10 percentage-point increments from 20% to 80%, but the average limit cannot exceed 60% of area median gross income. This allows properties to target very low-income families while still maintaining financial feasibility through the higher rents from families with incomes above the 60% level.
For a project in which the taxpayer elects the average income test, if the income of the occupants of the unit increases above 140% of the greater of: (1) 60% of area median gross income, or (2) the imputed income limitation designated by the taxpayer for the unit, then the unit ceases to be treated as a low-income unit if any residential rental unit in the building (of a size comparable to, or smaller than, such unit) is occupied by a new resident whose income exceeds the applicable imputed income limitation. In the case of a deep rent skewed project, 170% applies instead of 140%, and other special rules apply.
The average income test is effective for elections made after March 23, 2018.
Please contact your Sikich Tax Advisor with any questions about the changes to the low-income housing credit rules.