States are beginning the process of implementing a new “income averaging” option that allows the Low-Income Housing Tax Credit (LIHTC) to serve households earning up to 80 percent of area median income (AMI). This NMHC/NAA supported provision, which was enacted last March as part of the Consolidated Appropriations Act of 2018, makes the LIHTC program more flexible and allows for more mixed-income housing.
What is Income Averaging?
Income averaging provides an additional way for developments to qualify for the LIHTC. Previously, LIHTC program rules required owners to either rent 40 percent of their units to households earning no more than 60 percent of AMI, or 20 percent to those earning no more than 50 percent of AMI. Now, owners have the option of reserving 40 percent (25 percent for New York City) of the units in a property for people whose average income collectively is below 60 percent of AMI. Income averaging is available to new developments making their election after March 23, 2018. Developers make their election on Form 8609, which the IRS revised in late May to account for the new election.
How are states implementing Income Averaging?
The implementation of income averaging is raising many questions in the LIHTC community.
The National Council of State Housing Agencies (NCSHA) has prepared a comprehensive list of FAQs. NCSHA notes that states are not obligated to allow income averaging. But if they do so, no additional Internal Revenue Service guidance is necessary. NCSHA also clarifies that existing LIHTC properties cannot benefit from income averaging, only new developments. However, properties in the development pipeline may have the ability to make the election even if another election was originally forecast. Finally, while states are largely responsible for implementing the new income averaging provision, NCSHA has asked the IRS to assist HUD in calculating income limits and establishing next available unit designation rules when multiple tenants simultaneously exceed income limits. See the attached comment letter for more details.
As of June 11, eight state agencies had issued guidance regarding how they would put the provision into effect. Novogradac & Company LLP has prepared an analysis regarding the commonalities and differences among the states that include California, Georgia, Ohio, and Texas. Novogradac notes that “Several agencies preclude the option for any development with a recorded LIHTC extended use agreement (EUA), and others go farther to say the IA option will not be available until covered in a future [Qualified Allocation Plan] QAP.”
Industry Supports Further Expanding of LIHTC
NMHC/NAA support further expansion and strengthening of the LIHTC program. In addition to income averaging, last March Congress also increased LIHTC allocation authority by 12.5 percent for four years. . This increase was critical to restoring some of the value to the tax credit after tax reform lowered the corporate tax rate, which lowered the value of the credit to corporate investors and is expected to reduce demand for the credit.
NMHC/NAA encourage Congress to continue to invest in the LIHTC’s success by making permanent and further expanding the increase in program authority. Additionally, Congress should establish a minimum 4 percent tax credit rate, akin to current law’s minimum 9 percent credit rate -- so that investors may derive its full value. Under current law, the 4 percent credit rate floats and is worth considerably less due to low interest rates.
- Treasury, IRS Issue Guidance Related to LIHTC Relief Requirements
- NMHC Calls on Treasury to Modify Guidance When Using LIHTC
- NMHC Urges Treasury and IRS to Issue Final Regulations for Average Income Test Option Under the LIHTC
- Coalition Letter Regarding LIHTC Average Income Test
- IRS Issues Guidance on How to Report Carried Interests