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IRS expands temporary disaster relief provisions for low income housing credit

Rev Proc 2014-49, 2014-37 IRB

IRS has issued a Revenue Procedure which expands provisions which provide temporary relief from certain low income housing tax credit (LIHTC) requirements for agencies and building owners. The revenue procedure also provides emergency housing relief for individuals who are displaced by a major disaster from their principal residences in certain major disaster areas.

Background—LIHTC. The LIHTC is allowed annually over a ten-year credit period beginning with the tax year the qualified building is placed in service, or, under an irrevocable election, the next tax year. (Code Sec. 42(f)(1)) The credit equals the qualified building’s qualified basis times the applicable percentage (Code Sec. 42(a)) prescribed by IRS for the month placed in service or elected in agreement with the housing credit agency. (Code Sec. 42(b)(2)(A)) The building owner can’t claim a credit amount in excess of the allocation received from the state or housing credit agency for that year. (Reg. § 1.42-1T(e)(1))

Background—previous major disaster relief. Rev Proc 2007-54, 2007-31 IRB (see Weekly Alert ¶  8  07/05/2007) established temporary relief from certain requirements of Code Sec. 42 for owners and agencies in major disaster areas. Included in Rev Proc 2007-54 were provisions that (1) provided relief from the carryover allocation provisions (see below); (2) clarified the consequences if an owner failed to restore a building within a reasonable restoration period; (3) provided relief from certain compliance monitoring requirements; and (4) allowed owners to rely on the self-certification of income eligibility of an individual who was displaced from his or her principal residence as a result of a major disaster.

New Revenue Procedure expands relief. Rev Proc 2014-49 modifies and expands provisions contained in Rev Proc 2007-54 that provide temporary relief from certain LIHTC requirements for agencies and building owners. It also provides emergency housing relief for individuals who are displaced by a major disaster from their principal residences in certain major disaster areas.

Summary of changes in Rev Proc 2014-49. Rev Proc 2014-49’s key modifications to Rev Proc 2007-54 include: (1) changing the reasonable restoration period for recapture relief and the tolling period for severely damaged, destroyed, or uninhabitable buildings in the first year of the credit period; (2) in determining qualified basis, using the building’s qualified basis at the end of the tax year immediately preceding the first day of the incident period as determined by FEMA, rather than at the end of the tax year preceding the President’s Major Disaster declaration; (3) incorporating a temporary suspension of certain income limitations for displaced individuals (i.e., who were displaced from their principal residences as a result of a major disaster and whose principal residences are located in a Major disaster area); (4) eliminating the need for self-certification of income eligibility; (5) permitting a governmental housing credit agency (Agency) to allow a project owner within its jurisdiction to provide emergency housing relief to displaced individuals from other jurisdictions; (6) describing the consequences of providing emergency housing relief in the first year of the credit period and after the first year of the credit period; and (7) modifying the safe harbor relating to the amount of credit allowable to a restored building to provide relief in circumstances where the restoration cost is less than the eligible basis cost. (Rev Proc 2014-49, Sec. 3)

Details on certain of the changes in Rev Proc 2014-49. Here is additional information with respect to some of the above-listed changes in Rev Proc 2014-49:

… Relief for carryover allocations. Generally, a housing credit allocation is taken into account only if it’s made no later than the close of the calendar year in which the building is placed in service. (Code Sec. 42(h)(1)(B)) There is an exception to this rule, the carryover allocation exception, under which a credit allocation is taken into account if it’s made with respect to a “qualified building” placed in service not later than the close of the second calendar year following the calendar year in which the allocation is made. (Reg. § 1.42-6(a)(1)) A “qualified building” is any building which is part of a project if the taxpayer’s basis in the project, as of the date which is one year after the date the allocation was made, is more than 10% of the taxpayer’s reasonably expected basis in the project at the close of the second calendar year after the calendar year of the allocation. (Code Sec. 42(h)(1)(E)(ii))

Rev Proc 2014-49 provides that if an owner has a carryover allocation for a building located in a Major Disaster Area (i.e., any city, county, or other local jurisdiction for which a Major Disaster has been declared by the President and which has been designated by FEMA as eligible for Individual Assistance, Public Assistance, or both) and the incident period for the Major Disaster began prior to the deadline in Code Sec. 42(h)(1)(E), the Agency may grant the owner an extension. If the Agency grants such an extension, the Service will treat the owner as having satisfied the 10% basis requirement of Code Sec. 42(h)(1)(E)(ii) if the owner incurs more than 10% of the owner’s reasonably expected basis in the building (land and depreciable basis) no later than the expiration of that extension. (Rev Proc 2014-49, Sec. 6.02)

… Recapture relief. In general, under Code Sec. 42(j)(1), if (1) a building is beyond the first year of the credit period, and (2) at the end of the tax year, the building’s qualified basis with respect to the taxpayer is less than the qualified basis with respect to the taxpayer at the end of the preceding tax year, then the credits, if any, for the year of the reduction are determined using the reduced qualified basis, and the taxpayer’s Federal income tax liability for the year of the reduction is increased by credit recapture.

Rev Proc 2014-49 provides that if the building’s qualified basis is reduced by reason of a casualty loss, then, under Code Sec. 42(j)(4)(E), a building is not subject to recapture to the extent the loss is restored by reconstruction or replacement within a reasonable restoration period. The Agency must determine what constitutes a reasonable restoration period in the case of a Major Disaster that causes a reduction in qualified basis that would result in recapture or loss of credit. The reasonable restoration period established by the Agency must not extend beyond the end of the 25th month following the close of the month of the Major Disaster declaration. (Rev Proc 2014-49, Sec. 8.02)

Rev Proc 2014-49 modifies and supersedes Rev Proc 2007-54. (Rev Proc 2014-49, Sec. 15)

Effective date. Rev Proc 2014-49 is effective for Major Disasters declared on or after Aug. 21, 2014. (Rev Proc 2014-49, Sec. 16)

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