The IRS has provided guidance on the low-income housing credit’s average-income test. The final and temporary regulations affect owners of low-income housing projects, tenants in those projects, and state or local housing credit agencies that monitor compliance with the low-income housing credit requirements. (TD 9967, Preamble to Prop Reg REG-113068-22)
In October 2020, the IRS published proposed reliance regs (Preamble to Prop Reg REG-119890-18) that provided guidance on the low-income housing credit average-income test. These proposed regs clarified the use of the average-income test by residential rental property projects. See Proposed low-income housing credit reliance regs (10/30/2020).
Final regs.
The final regs (TD 9967) adopt the 2020 proposed regs with certain modifications. According to the IRS, the final regs provide more flexibility for meeting the average-income test than the 2020 proposed regs. Specifically, the “final regs limit the impact of one unit’s noncompliance on the ability of a project to satisfy the average-income test because the status of additional units (beyond the minimum number of units needed to satisfy the test) does not impair satisfaction of the average-income test.”
In addition, under the final regs a taxpayer must separately identify (i) units in the qualified group of units used for satisfying the average-income set-aside, and (ii) units in the qualified group for purposes of the applicable fractions (collectively “units”).
Temporary/proposed regs.
The temporary regs (also issued as proposed regs) require the taxpayer to identify these units in their books and records and to communicate that identification each year to the applicable agency. According to the IRS, this guidance will allow taxpayers, agencies and the IRS to more easily verify the status, including the average imputed income limitation, of the group of units the taxpayer used to satisfy the average-income set-aside and the group of units used for determining the applicable fraction(s).
The temporary regs also provide agencies with the discretion to waive any failure to comply with the temporary regs’ recordkeeping and reporting requirements. The waiver may be issued up to 180 days after discovery of the failure, whether by taxpayer or agency, and may treat the relevant requirements as having been satisfied.
Generally, the final and temporary regs apply to tax years beginning after December 31, 2022. However, a taxpayer may choose, under certain conditions, to apply them for tax years beginning after October 12, 2022, and before January 1, 2023.
For more information about the low-income housing credit average-income test, see Checkpoint’s Federal Tax Coordinator ¶L-15700.
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