On May 5, 2009, the Internal Revenue Service (IRS) released an NMHC-sought clarification (Notice 2009-44) concerning utility allowance calculations on Low-Income Housing Tax Credit (LIHTC) properties that submeter.
Tax credit rents include a utility allowance for resident-paid utilities; however, the methods the IRS has traditionally allowed owners to use to estimate resident utility costs tend to overestimate them. This, in turn, reduces the gross rent received by owners and threatens the financial viability of many LIHTC properties
Last July, the IRS published long-awaited regulations changing the way rents are adjusted on Low-Income Housing Tax Credit (LIHTC) properties where residents pay for their own utilities by allowing owners to use more accurate data to calculate resident-paid utilities. NMHC led an industry coalition that has sought these important changes since 2004.
However, without any prior notice or discussion, the IRS added language to the final regulations that fundamentally changed an owner’s ability to submeter. Specifically, the regulations state that only utilities directly paid by the resident to the utility company can be included in the utility allowance. NMHC immediately launched an effort challenging the IRS's interpretation and sought today's clarification.
The May 5, 2009 guidance confirms that utilities paid by a renter occupying a submetered unit that are based on actual consumption of that unit will count as resident-paid utilities under the utility allowance regulation.
The IRS notice further provides that, in the case of submetered utility costs:
- The rates charged to renters must not exceed the rates charged by the utility company to the building owner (or their agents).
- An administrative fee (not to exceed $5 per month unless otherwise provided by state law) charged to renters by the building owner (or their agents) will not be considered gross rent for purposes of the LIHTC rules.
- Sewage costs included in a combined water and sewage bill that are based on the resident's actual water consumption determined with a submetering system are likewise treated as paid directly by the resident.