[Federal Register Volume 87, Number 196 (Wednesday, October 12, 2022)]
[Rules and Regulations]
[Pages 61489-61506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-22070]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9967]
RIN 1545-BO92
Section 42, Low-Income Housing Credit Average Income Test
Regulations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final and temporary regulations setting
forth guidance on the average income test for purposes of the low-
income housing credit. If a building is part of a residential rental
project that satisfies this test, the building may be eligible to earn
low-income housing credits. These 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 requirements for low-income housing credits.
DATES:
Effective date: These regulations are effective on October 12,
2022.
Applicability date: For the applicability date of the temporary
regulations, see Sec. 1.42-19T(f).
FOR FURTHER INFORMATION CONTACT: Dillon Taylor at (202) 317-4137.
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 42 of the Internal Revenue Code (the Code).
The Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085 (1986
Act), created the low-income housing credit under section 42 of the
Code.
Section 42(a) provides that the amount of the low-income housing
credit for any taxable year in the credit period is an amount equal to
the applicable percentage (effectively, a credit rate) of the qualified
basis of each qualified low-income building.
Section 42(c)(1)(A) provides that the qualified basis of any
qualified low-income building for any taxable year is an amount equal
to (i) the applicable fraction (determined as of the close of the
taxable year) of (ii) the eligible basis of the building (determined
under section 42(d)). Section 42(c)(1)(B) defines applicable fraction
as the smaller of the unit fraction or floor space fraction. The unit
fraction is the number of low-income units in the building over the
number of residential rental units (whether or not occupied) in the
building. The floor space fraction is the total floor space of low-
income units in the building over the total floor space of residential
rental units (whether or not occupied) in the building. Subject to
certain exceptions set forth in section 42(i)(3)(B), a low-income unit
is defined in section 42(i)(3) as any unit in a building if the unit is
rent-restricted and the individuals occupying the unit meet the income
limitation under section 42(g)(1) that applies to the project of which
the building is a part. Section 42(d)(1) and (2) define the eligible
basis of a new building or an existing building, respectively.
Section 42(c)(2) defines a qualified low-income building as any
building which is part of a qualified low-income housing project at all
times during the compliance period (the period of 15 taxable years
beginning with the first taxable year of the credit period). To qualify
as a low-income housing project, one of the section 42(g) minimum set-
aside tests, as elected by the taxpayer, must be satisfied.
Prior to the enactment of the Consolidated Appropriations Act of
2018, Public Law 115-141, 132 Stat. 348 (2018 Act), section 42(g) set
forth two minimum set-aside tests, known as the 20-50 test and the 40-
60 test. If a taxpayer elects to apply the 20-50 test, at least 20
percent of the residential units in the project must be both rent-
restricted and occupied by tenants whose gross income is 50 percent or
less of the area median gross income (AMGI). If a taxpayer elects to
apply the 40-60 test, at least 40 percent of the residential units in
the project must be both rent-restricted and occupied by tenants whose
gross income is 60 percent or less of AMGI.
The 2018 Act added section 42(g)(1)(C), which contains a third
minimum set-aside test option--the average income test. If a taxpayer
elects to apply the average income test, a project meets the minimum
requirements of the average income test if 40 percent or more of the
residential units in the project are both rent-restricted and occupied
by tenants whose income does not exceed the imputed income limitation
designated by the taxpayer with respect to the specific unit. (In the
case of a project described in section 142(d)(6)), ``40 percent'' in
the preceding sentence is replaced with 25 percent.) Section
42(g)(1)(C)(ii)(I)-(III) provides special rules relating to the income
limitation for the average income test. Specifically, unlike the 20-50
and 40-60 tests, section 42(g)(1)(C)(ii)(I) requires the taxpayer to
designate each unit's imputed income limitation that is taken into
account for purposes of the average income test. Section
42(g)(1)(C)(ii)(II) requires the average of the imputed income
limitations designated under section 42(g)(1)(C)(ii)(I) not to exceed
60 percent of AMGI. Finally, section 42(g)(1)(C)(ii)(III) requires the
imputed income limitation designated for any unit to be 20, 30, 40, 50,
60, 70, or 80 percent of AMGI.
Generally, under section 42(g)(2)(D)(i), if the income for the
occupant of a low-income unit rises above the relevant income
limitation, the unit continues to be treated as a low-income unit if
the income of the occupant had initially met the income limitation and
the unit continues to be rent-restricted. Section 42(g)(2)(D)(ii),
however, provides an exception to the general rule in the case of the
20-50 test or the 40-60 test. Under this exception, the unit ceases to
be treated as a low-income unit if two disqualifying conditions occur.
The first condition is that the occupant's income
increases above 140 percent of the income limitation applicable under
section 42(g)(1) (applicable income limitation).
The second condition is that a new occupant whose income
exceeds the applicable income limitation occupies any residential
rental unit in the building of a comparable or smaller size.
In the case of a deep rent skewed project described in section
142(d)(4)(B) of the Code ``170 percent'' is substituted for ``140
percent'' in applying the applicable income limitation under section
42(g)(1), and the second condition is that any low-income unit in the
building is occupied by a new resident whose income exceeds 40 percent
of AMGI.
The exception contained in section 42(g)(2)(D)(ii) is referred to
as the next
[[Page 61490]]
available unit rule. See also Sec. 1.42-15 of the Income Tax
Regulations.
The 2018 Act added a new next available unit rule in section
42(g)(2)(D)(iii), (iv), and (v) for situations in which the taxpayer
has elected the average income test. Under this new rule, a unit ceases
to be a low-income unit if two slightly different disqualifying
conditions are met:
First, the income of an occupant of a low-income unit
increases above 140 percent of the greater of (i) 60 percent of AMGI,
or (ii) the imputed income limitation designated by the taxpayer with
respect to the unit; and
Second, a new occupant whose income exceeds the applicable
imputed income limitation occupies any other residential rental unit in
the building that is of a comparable or smaller size. The applicable
imputed income limitation for this purpose depends upon whether the
unit being occupied was a low-income unit before becoming vacant.
[cir] If the new tenant occupies a unit that was taken into account
as a low-income unit prior to becoming vacant, section
42(g)(2)(D)(v)(I) provides that the applicable imputed income
limitation is the limitation designated with respect to the unit.
[cir] If the new tenant occupies a market-rate unit, section
42(g)(2)(D)(v)(II) provides that the applicable imputed income
limitation is ``the imputed income limitation which would have to be
designated with respect to such unit under [section 42(g)(1)(C)(ii)(I)]
in order for the project to continue to meet the requirements of
[section 42(g)(1)(C)(ii)(II)].'' (Those requirements mandate that the
``average of the imputed income limitations designated under [section
42(g)(1)(C)(ii)(I)] shall not exceed 60 percent of'' AMGI.)
Section 42(g)(2)(D)(iv) also provides a next available unit rule
for deep rent skewed projects that elect the average income test.
Under section 42(g), once a taxpayer elects to use a particular
set-aside test for a project, that election is irrevocable. Thus, if a
taxpayer had previously elected to use the 20-50 test or the 40-60
test, the taxpayer may not subsequently elect to use the average income
test. Under section 42(g)(4), the rules of sections 142(d)(2)(B)
through (E), 142(d)(3) through (7), and 6652(j) of the Code apply to
determine whether any project is a qualified low-income housing project
and whether any unit is a low-income unit.
Section 42(m)(1) provides that the owners of an otherwise-
qualifying building are not entitled to the housing credit dollar
amount that is allocated to the building unless, among other
requirements, the allocation is pursuant to a qualified allocation plan
(QAP). A QAP provides standards by which a State or local housing
credit agency (Agency) is to make these allocations. Under section
42(m)(1)(B)(iii), a QAP must contain a procedure that the Agency or its
agent will follow in monitoring noncompliance with low-income housing
credit requirements and in notifying the IRS of any such noncompliance.
See Sec. 1.42-5 of the Income Tax Regulations for rules implementing
this requirement.
On October 30, 2020, the Department of Treasury (Treasury
Department) and the IRS published a notice of proposed rulemaking
(NPRM) (REG- 119890-18) in the Federal Register (85 FR 68816) proposing
regulations setting forth guidance on the average income test under
section 42(g)(1)(C). The Treasury Department and the IRS received 98
comments, including requests to testify at a public hearing on the
proposed regulations and written testimony for the public hearing.
On March 24, 2021, the Treasury Department and the IRS held a
public hearing on the proposed regulations. Fifteen taxpayers provided
testimony at the hearing.
After consideration of the comments received and the testimony
provided, the proposed regulations are adopted as modified by this
Treasury Decision. The major areas of comment and the revisions to the
proposed regulations are discussed in the following Summary of Comments
and Explanation of Revisions. The comments are available for public
inspection at www.regulations.gov or upon request. Other minor, non-
substantive modifications that were made to the proposed regulations
and adopted in these final regulations are not discussed in the Summary
of Comments and Explanation of Revisions. In addition, the Treasury
Department and the IRS are publishing in this Treasury Decision
temporary regulations containing recordkeeping and reporting
requirements that are needed to facilitate administrability of, and
compliance with, changes made in the final regulations. Those changes
were based on comments received on the proposed rule. These
requirements are described in this preamble along with the substantive
rules contained in the final regulations. The text of these temporary
regulations also serves as the text of the proposed regulations (REG-
113068-22) set forth in the notice of proposed rulemaking on this
subject in the Proposed Rules section of this issue of the Federal
Register.
Summary of Comments and Explanation of Revisions
These final regulations and temporary regulations set forth
guidance on the average income test under section 42(g)(1)(C).
I. Section 1.42-15, Next Available Unit Rule for the Average Income
Test
The proposed regulations updated the next available unit provisions
in Sec. 1.42-15 to reflect the new set-aside based on the average
income test and to take into account section 42(g)(2)(D)(iii), (iv),
and (v). One commentator recommended that no changes be made to the
proposed regulations concerning the next available unit rule when the
proposed regulations are finalized. No other comments were received on
the next available unit rule.
While no comments requested changes, the final regulations for the
next available unit rule were revised to be consistent with changes
made to the provisions in Sec. 1.42-19, which are described in section
II of this Summary of Comments and Explanation of Revisions. The final
regulations include revisions to the two limitations in Sec. 1.42-
15(c)(2)(iv) related to the imputed income designation of the next
available unit, which relate to the limitations described in section
42(g)(2)(D)(v). The final regulations provide taxpayers with
administrable rules and objective standards to apply when determining
the designation of the next available unit. The first limitation in
Sec. 1.42-15(c)(2)(iv)(A) applies to units that met all of the
requirements in Sec. 1.42-19(b)(1)(i) through (iii) prior to becoming
vacant. In other words, the unit was rent-restricted, the occupants
satisfied the imputed income limitation for the unit (or the unit's
low-income status continued under section 42(g)(2)(D)), and no other
provision in section 42 or the regulations thereunder denied low-income
status to the unit. For those units, which would have had a designated
imputed income limitation prior to vacancy, the limitation is the
unit's designated imputed income limitation. This rule is equivalent to
the rule in the proposed regulations, which interpreted the definition
of low-income unit as including only the requirements in Sec. 1.42-
19(b)(1)(i) through (iii). The second limitation in Sec. 1.42-
15(c)(2)(iv)(B) requires a taxpayer, in the case of any other unit
(such as a market rate unit), to limit the imputed income limitation to
a designation that will not cause the average of all imputed income
designations of residential units in the
[[Page 61491]]
project to exceed 60 percent of AMGI. This ensures that the next
available unit is designated in such a way that maintains compliance
with the averaging requirement in section 42(g)(2)(C)(ii)(II). This
revision to the second limitation was necessary because the proposed
regulations relied on a reference to the mitigating action provisions,
which were removed from the final regulations as explained in section
II.B. of this Summary of Comments and Explanation of Revisions.
Additionally, these final regulations provide that, if multiple
units are over-income at the same time in a project that has elected
the average income set-aside (average income project) and that has a
mix of low-income and market-rate units, then the taxpayer need not
comply with the next available unit rule in a specific order with
respect to occupancy. Instead, renting any available comparable or
smaller vacant unit to a qualified tenant maintains all over-income
units' status as low-income units until the next comparable or smaller
unit becomes available (or, in the case of a deep rent skewed project,
the next low-income unit becomes available). The final regulations
include an example illustrating the application of this rule. Note, the
order in which units are designated, however, may affect the qualified
group that is used for computing the applicable fraction. See further
discussion in section II.B of this Summary of Comments and Explanation
of Revisions.
II. Sec. 1.42-19, Average Income Test
A. Requirements To Satisfy the Average Income Test
1. Proposed Regulations Approach to the Average Income Test
The proposed regulations provided that a project for residential
rental property meets the requirements of the average income test under
section 42(g)(1)(C) if (1) 40 percent or more (25 percent or more in
the case of a project described in section 142(d)(6)) of the
residential units in the project are both rent-restricted and occupied
by tenants whose income does not exceed the imputed income limitation
designated by the taxpayer with respect to the respective unit; (2) the
taxpayer designated the imputed income limitations in the manner
provided in Sec. 1.42-19(b) of the proposed regulations; and (3) the
average of the designated imputed income limitations of the low-income
units in the project does not exceed 60 percent of AMGI. The proposed
regulations would have required taxpayers to complete, not later than
the close of the first taxable year of the credit period, the initial
designation of imputed income limitations for all of the units taken
into account for the average income test.
Under the proposed regulations, the 60 percent of AMGI limit on the
average of designated imputed income limitations applied to all of the
low-income units in the project. The requirement as so interpreted did
not take into account whether fewer than all of those units could
constitute a group of at least 40 percent of the residential units in
the project such that the average of the limitations of the units in
that group averaged to no more than 60 percent of AMGI.
In some cases, this interpretation magnified the adverse
consequences of a single unit's failure to maintain low-income status.
For example, under the proposed regulations, a unit losing low-income
status would remove that unit's imputed income limitation from the
computation of the average, but not impact the low-income status of any
other units. If that unit's limitation was less than 60 percent of
AMGI, the loss of the unit could cause the average of the remaining
low-income units to rise above 60 percent of AMGI. That noncompliant
average would cause the entire project to fail the average income test
and therefore fail to be a qualified low-income housing project. In
light of the potential adverse consequences of the rule, the proposed
regulations provided for mitigating actions the taxpayer could take
within 60 days of the close of the year for which the average income
test might be violated.
2. Comments on the Proposed Set-Aside Rule
Many commenters disagreed with the adequacy of the proposed
mitigation actions and with the correctness of the underlying
interpretation of the average income test, which required testing of
all low-income units.
i. Inadequacy of the Proposed Mitigation Actions
Commenters noted that the mitigation possibilities in the proposed
regulations depended on the taxpayer both appreciating that the entire
project might be jeopardized by a problem with a particular unit and
knowing how to deploy the mitigation actions. Commenters also suggested
that the mitigation proposal incorporated such a rigid deadline that
even alert and well-advised taxpayers might be unable to timely take
mitigating actions to be eligible to receive credits for their
projects.
ii. Invalidity of the Underlying Interpretation
Commenters' central concern was the invalidity, as they saw it, of
the underlying interpretation of the average income test. Under the
interpretation in the proposed regulations, a single unit's falling out
of compliance could result in the complete loss of tax credits for the
entire project, or at least loss of credits for an entire year.
Commenters noted that this result flowing from the interpretation in
the proposed regulations suggested the invalidity of the
interpretation. Several commenters observed that the proposed
regulations imposed on projects electing the average income test a
higher standard than that required for satisfying the other set-aside
elections. Under the 20-50 test and 40-60 test, one noncompliant unit
could not cause an entire project to fail the set-aside test if,
without taking the noncompliant unit into account, there remained a
sufficient number of compliant units to meet the statutory minimum
percentage of all residential units. The commenters, therefore,
concluded that the interpretation in the proposed regulations regarding
the average income test could not have been the intent of Congress.
Most commenters recommended that the average income test be
satisfied if any group of 40 percent of the units in the project have
designations whose average does not exceed 60 percent of AMGI. In
general, these commenters correctly asserted that the average income
test is a minimum set-aside test, and, therefore, a project should meet
the test if the minimum requirements of the test are satisfied, even if
low-income units not necessary for the minimum are noncompliant.
Other commenters noted that even though the project should
additionally meet an overall average test of no more than 60 percent of
AMGI across all low-income units (as required by the proposed
regulations), relief should nevertheless be built into the requirement.
Thus, if a unit is out of compliance, causing the project-wide average
to go above 60 percent of AMGI, the failure should be considered
noncompliance for that unit only, and only that non-compliant unit
should be subject to credit adjustment and recapture. They urged that
this noncompliance should not be a violation of the minimum set-aside,
provided that at least 40 percent of the units' designations still meet
the 60 percent average.
This suggested approach, however, could create problems similar to
those in the proposed regulations because one
[[Page 61492]]
unit's noncompliance could cause the overall average of the remaining
low-income units to rise above 60 percent of AMGI. For this reason, the
comment was not adopted, but it was considered in connection with
developing the final regulations' rules for determining low-income
units and a building's applicable fraction, as is discussed later.
Some commenters believed that the average income test is satisfied
as long as the original imputed income limitations of designated low-
income units average to 60 percent, and 40 percent or more of those
units continue to be rent-restricted and meet their respective imputed
income limitations. Thus, the average must be met initially, but
subsequently, the requirement is permanently satisfied, regardless of
any changes in circumstances related to occupancy. Commenters suggested
that a general anti-abuse rule could be adopted to allow the IRS to
disregard designations made in bad faith.
The Treasury Department and the IRS do not agree that the averaging
requirement of section 42(g)(1)(C)(ii)(II) is concerned only with the
original designations. Like the other minimum set-aside tests, the
average income test is an ongoing requirement for a project to maintain
its status as a qualified low-income housing project. A project failing
to maintain an average of 60 percent or less of AMGI across at least 40
percent of its residential units that qualify as low-income units
violates the requirement. This is consistent with a plain reading of
the statute, as the imputed income limitations of the units taken into
account (meaning, counted for purposes of meeting the average income
test) must not exceed 60 percent of AMGI. Section 42(g)(1)(C)(ii)(I)
and (II). The rejected suggestion would allow an original imputed
income limit designation of a subsequently disqualified unit to satisfy
compliance with the minimum set-aside test throughout the entire
compliance period. Treating such a situation as compliant would
effectively waive the rule that a project consistently maintain its
level of affordability--a central requirement of the low-income housing
credit. Moreover, adoption of a general anti-abuse rule would miss many
non-compliant situations, would increase administrative complexity for
the IRS and the Agencies and would potentially create uncertainty for
taxpayers.
A separate comment recommended that an out-of-compliance unit
should maintain its designation if the owner can demonstrate due
diligence when completing the initial income certification. The
Treasury Department and IRS disagree with the suggestion that an out-
of-compliance unit should not lose its designation if the owner can
demonstrate due diligence when completing the initial income
certification. Demonstrating due diligence upon initial income
certification is not sufficient to satisfy ongoing compliance
requirements. Further, similar to a general anti-abuse rule proposed by
another commenter, this approach would increase administrative
complexity for the IRS and Agencies and could potentially create
uncertainty for taxpayers.
3. The Final Regulations' Interpretation of the Average Income Test
In response to the comments received, the Treasury Department and
the IRS have revised their interpretation of the set-aside rule and
incorporated the revised interpretation in the final regulations. In
making these revisions, the Treasury Department and the IRS considered
the plain language of section 42(g)(1)(C) as well as the definition of
low-income unit for projects electing the average income test. When
section 42(g)(1)(C)(i) and the special rules in section
42(g)(1)(C)(ii)(I) and (II) are read together, the taxpayer satisfies
the average income test if at least 40 percent of the building's
residential units are eligible to be low-income units and have
designated imputed income limitations that collectively average 60
percent or less of AMGI. A project satisfying this minimum requirement
satisfies the average income test. Thus, the final regulations have
been revised so that it is no longer necessary to consider all low-
income units in a project for residential rental property when
determining whether the average income test is met.
While making this change, the Treasury Department and the IRS also
considered the definition of ``low-income unit'' in a project electing
the average income test, and the final regulations provide a clarifying
definition of this term. As the final regulations no longer require a
taxpayer to consider all of the low-income units in a project in order
to satisfy the minimum set-aside requirement, the issue for
consideration is whether a project's election of the average income
test has any impact on whether a unit that is rent-restricted and whose
occupants satisfy the imputed income limitation designated for the unit
qualifies as a low-income unit as that term is defined in section
42(i)(3). This determination is relevant for the average income test as
well as for purposes of the other provisions of the low-income housing
credit, including a building's applicable fraction as explained later.
In defining the term ``low-income unit,'' section 42(i)(3)(A)(ii)
requires that the individuals occupying the unit meet the income
limitation applicable under section 42(g)(1) to the project of which
the building is a part. With respect to the 20-50 and the 40-60 minimum
set-asides, there is no difficulty in applying this language to
specific units. Every unit in the project has an identical income
limitation, namely the income limitation embodied in the set-aside test
that the taxpayer elected for that project. If the taxpayer elects the
20-50 test, then the income limitation for each unit is 50% of AMGI. If
the taxpayer elects the 40-60 test, the income limitation for each unit
is 60% of AMGI.
For a project electing the average income test, however, the
reference to ``the income limitation applicable . . . to the project''
poses a challenge because income limitations will typically vary among
the units in the project. In addition, pursuant to section
42(g)(1)(C)(ii)(II), the average of the designated imputed income
limitations for the units taken into account for meeting the minimum
set-side test must not exceed 60% of AMGI. As a result, for purposes of
the average income test, the fact that the occupants of a unit satisfy
the imputed income limitation designated for that unit does not by
itself establish that the unit satisfies the requirements in section
42(i)(3)(A).
The Treasury Department and the IRS considered interpreting the
language in section 42(i)(3)(A)(ii) as referring only to the income
limitation designated for a specific unit. Such an interpretation would
be consistent with the approach under the 20-50 and 40-60 tests where a
single unit's noncompliance does not impact the low-income status of
any other low-income units in the project. It would also be in accord
with many comments that argue the low-income status of one unit should
not impact the status of other units if those other units meet their
respective income limitations.
In a project electing the average income test, however, it is
insufficient to read ``the income limitation applicable under [section
42(g)(1)] to the project'' as referring only to the designated imputed
income limitation appliable to a unit. Under the average income test, a
unit's status as a low-income unit for purposes of the set-aside and
the applicable fraction depends not only on its own attributes but also
on the income limitations of other units that are taken into account
for these purposes. In contrast, under the historic set-asides, knowing
that a unit satisfies the income limitation
[[Page 61493]]
applicable to the unit is sufficient to know that the unit meets the
project's income limitation for purposes of the minimum set-aside test
and a building's applicable fraction.
This interpretation means that to qualify as a low-income unit in a
project electing the average income test, a residential unit, in
addition to meeting the other requirements to be a low-income unit
under section 42(i)(3), must be part of a group of units such that the
average of the imputed income limitations of the units in the group
does not exceed 60 percent of AMGI. Thus, to provide clarity on the
definition of low-income unit for a project electing the average income
test, the final regulations include a definition of low-income unit
that takes into account whether the unit is a member of a group of
units with a compliant average limitation.
This definition of low-income unit in the final regulations is in
accord with the definition of low-income unit as originally described
in the Conference Report for the Tax Reform Act of 1986 (1986
Conference Report):
A low-income unit includes any unit in a qualified low-income
building if the individuals occupying such unit meet the income
limitation elected for the project for purposes of the minimum set-
aside requirement and if the unit meets the gross rent requirement,
as well as all other requirements applicable to units satisfying the
minimum set-aside requirement.
2 H.R. Conf. Rep. 99-841, 99th Cong., 2d Sess., II-94-95.
In that explanation, it is required that a low-income unit meet
``all other requirements applicable to units satisfying the minimum
set-aside test.'' Although the average income test was not in existence
at the time of the 1986 Conference Report, it is apparent that Congress
wanted to avoid creating one standard for low-income units that
qualified their projects as part of the 20-50 and 40-60 minimum set-
asides and a different standard for any other low-income units that
played some other role in the same project. Thus, it is consistent with
how low-income units are defined under the 20-50 and 40-60 minimum set-
aside tests for these final regulations to require all low-income units
in an average income project to satisfy a consistent and equal set of
standards--standards that, in the average income context, incorporate
the average income limitations of the group of which the units are a
part.
Accordingly, under the final regulations, a project for residential
rental property meets the requirements of the average income test if
the taxpayer's project contains a qualified group of units that
constitutes 40 percent or more (25 percent or more in the case of a
project described in section 142(d)(6)) of the residential units in the
project. Section 1.42-19(b)(2)(i) requires the units in a qualified
group to, first, individually satisfy the criteria that would qualify
each unit as a low-income unit under the 20-50 or 40-60 set-asides.
Specifically, the rules in Sec. 1.42-19(b)(1)(i) through (iii) require
that each unit be rent-restricted, occupants of the unit meet the
income limitation for the unit, and no other provision in section 42 or
the regulations thereunder denies low-income status to the unit
(including section 42(i)(3)(B)-(E)). In addition, Sec. 1.42-
19(b)(2)(ii) requires that the average of the designated imputed income
limitations of the units in the group not exceed 60 percent of AMGI.
The group of units must be identified as required in Sec. 1.42-
19(b)(3)(i). A taxpayer identifies the units in the group by recording
the units in the taxpayer's books and records, and the taxpayer must
communicate that annual identification to the applicable Agency as
required in Sec. Sec. 1.42-19(b)(3)(iii) and 1.42-19T(c)(1) of the
associated temporary regulations. See further description in section
II.C of this Summary of Comments and Explanation of Revisions.
These revisions provide more flexibility for meeting the average
income test than had been available under the proposed regulations.
Most importantly, the revised rules limit the impact of one unit's
noncompliance on the ability of a project to satisfy the average income
test. 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 as discussed in section II.B of this Summary of Comments
and Explanation of Revisions. By removing the proposed requirement
applicable to all low-income units and thus allowing a project to
satisfy the average income test if it contains a qualified group of
units meeting the minimum requirements, the final regulations generally
avoid the outsized impact that one unit's loss of low-income status
could have under the proposed regulations. The interpretation of the
average income set-aside in the final regulations is consistent with
the majority of comments on this issue.
In addition, this interpretation creates more parallels between the
average income test and the 20-50 and 40-60 tests. Under either of
those latter tests, when there are more than the minimum number of low-
income units, one unit going out of compliance would not cause a
project to fail the minimum set-aside test. Similarly, under the final
regulations, one unit's loss of low-income status will not jeopardize
the entire project's status as a qualified low-income housing project
subject to the average income test if there are a sufficient number of
remaining units that comprise a qualified group of units that satisfy
the minimum set-aside.
B. Determining Qualified Groups of Units for Use in Applicable Fraction
Determinations
1. Role of the Applicable Fraction Under Section 42
As mentioned earlier, the amount of low-income housing credits
earned by a building in a taxable year depends on a computation that
includes a number called the building's ``applicable fraction'' for
that year. This fraction is based on the number and size of the low-
income and non-low-income units in the building and can be thought of
as an indicator of the extent to which the building is dedicated to
affordable housing. Thus, the applicable fraction plays a role both in
determining credits during the credit period and in demonstrating
continued dedication to affordable housing during the extended use
period. See section 42(h)(6)(B)(i).
2. The Proposed Regulations' Resolution of Issues Posed by Computation
of the Applicable Fraction in an Average Income Project
The proposed regulations provided an approach to addressing
continuous compliance with the average income requirement by using the
same group of low-income units for both satisfying the minimum set-
aside requirement and determining the applicable fraction. The proposed
regulations also provided for a removed unit, which was a low-income
unit identified by the taxpayer that was not taken into account for
purposes of the set-aside test or the applicable fraction but was taken
into account for purposes of reducing recapture. As described earlier
in this Summary of Comments and Explanation of Revisions, taxpayers
strongly criticized the set-aside rule. In response, the final
regulations both allow the minimum set-aside test to be satisfied by
any qualified group of units that is no smaller than the statutory
minimum (40 percent) and also add a clarifying definition of ``low-
income unit'' for projects electing the average income test. To
implement the statutory requirement regarding the average of the
imputed income limitations of residential units in a project, this
clarifying definition is sensitive to the
[[Page 61494]]
imputed income limitations of the other residential units in the same
group.
The approach in the final regulations for the average income test
differs from the other two set-asides in that the final regulations
allow for a distinction between the group of low-income units taken
into account for satisfying the minimum set-aside and the (usually
larger) group of units taken into account for computing credits.
However, under the final regulations, the units included in both groups
are subject to the same standards.
Congress acknowledged the absence of such a distinction in the 20-
50 and 40-60 tests in its discussion of the low-income housing credit
in the 1986 Conference Report:
Qualified residential rental projects must remain as rental
property and must satisfy the minimum set-aside requirement,
described above, throughout a prescribed compliance period. Low-
income units comprising the qualified basis on which additional
credits are based are required to comply continuously with all
requirements in the same manner as units satisfying the minimum set-
aside requirements. Units in addition to those meeting the minimum
set-aside requirement on which a credit is allowable also must
continuously comply with the income requirement.
2 H.R. Conf. Rep. 99-841, 99th Cong., 2d Sess., II-95.
Thus, under the 20-50 and 40-60 tests, units included in qualified
basis in addition to those needed to satisfy the minimum set-aside must
meet the same requirements as the units used to satisfy the minimum
set-aside. This application under the 20-50 and 40-60 tests is
straightforward, however, because all low-income units have to be at or
less than a single elected AMGI standard, either 50 percent or 60
percent of AMGI (assuming other requirements are met). Under either
test, the minimum set-aside units and any additional low-income units
are effectively interchangeable, so there was no need to clarify
treatment between the groups.
For the average income test, however, units are not interchangeable
because they have a range of imputed income limitations and cannot be
evaluated in isolation because there is an income averaging requirement
in section 42(g)(1)(C)(ii)(II). By stating that additional units beyond
those meeting the minimum set-aside test must continuously comply with
the income requirement, the 1986 Conference Report identified the
necessity of developing a common standard for all residential units in
projects electing the 20-50 and 40-60 tests. As discussed in section
II.A.3 of this Summary of Comments and Explanation of Revisions, this
principle is reflected in the final regulations' definition of low-
income units, and it impacts the treatment of units that may be taken
into account for computing a building's applicable fraction.
3. Comments on Determining the Applicable Fraction
In the context of the 20-50 or 40-60 minimum set-asides, commenters
noted, non-compliance by one or more units (for example, not being
suitable for occupancy) reduces a building's applicable fraction only
with respect to the units that are non-compliant as of the taxpayer's
year end. These commenters recommended similar treatment in the average
income context. They advocated evaluating eligibility of units for
inclusion in the applicable fraction on a unit-by-unit basis (that is,
taking into account only facts about the particular unit, without
taking into account the designated imputed income limitation of other
units).
In the context of removed units, some comments argued that the
proposed applicable fraction treatment of these units amounted to
``double counting.'' Not only did the proposed regulations exclude the
noncompliant unit from the computation of the applicable fraction of
the building containing the unit, but by taking into account the
average of the group's income limitations, they could force a taxpayer
to exclude one or more compliant units from the applicable fraction(s)
of the building(s) containing the compliant unit(s).
The Treasury Department and the IRS considered the proposal to
include units in applicable fraction computations on a unit-by-unit
basis but did not adopt it. To be sure, that proposal would preserve
the requirement that units satisfying the set-aside requirement must
have income limitations whose average does not exceed 60 percent of
AMGI. The proposal, however, would not apply this average requirement
to the units that are taken into account for the project's applicable
fractions. The proposed approach would thus be inconsistent with the
language of section 42(c)(1)(c)(i), which provides that the numerator
of the applicable fraction is number of ``low-income units'' in the
building. As explained earlier in the discussion of the average income
test, the definition of low-income unit for a project electing the
average income test necessarily includes the requirement that the
average of the designated income limitations of the units taken into
account as low-income units includes that the average designated income
limitations of the units not exceed 60% of AMGI.
In addition, the failure to apply the average income limitation in
determining the applicable fraction would allow a taxpayer to include
units in the qualified basis even if they are a majority of the units
in a project and their average limitation greatly exceeds 60 percent of
AMGI. If accepted, the proposal would have allowed a taxpayer to give
appropriate income limitations to 40 percent of a project's units but
to designate limitations of 80 percent of AMGI for all the remaining
low-income units in the project and receive credits for all of these
units.
In the context of determining what units to include in the
applicable fraction, another commenter recommended revising the
proposed regulations to include an exception for units that are not
habitable due to a casualty loss, such as from a fire in the unit. The
commenter asserted that because the noncompliance was not the fault of
taxpayer, the regulations should not require the taxpayer to remove
another unit from an applicable fraction to offset the noncompliance
associated with the casualty loss. The Treasury Department and the IRS
did not adopt this suggestion. An approach that requires a
determination of fault would create additional complexity for
taxpayers, Agencies, and the IRS. In addition, while the 20-50 and 40-
60 set-asides do not have the same issue, adopting rules allowing for
special treatment in the case of casualties would necessitate a broader
section 42 regulatory project.
4. Determination of the Applicable Fraction in the Final Regulations
Under the final regulations, the determination of a group of units
to be taken into account in the applicable fractions for the buildings
in a project follows the same approach as determining a group of units
to be taken into account for purposes of the set-aside test.
Essentially, a taxpayer can determine this group of units by including
the low-income units identified for the average income test, and any
other residential units that can qualify as low-income units if they
are part of a group of units such that the average of the imputed
income limitations of all of the units in the group does not exceed 60
percent of AMGI. If the average exceeds 60 percent of AMGI, then the
group is not a qualified group. For example, if a unit was designated
at 80 percent of AMGI and if including that unit in an otherwise
qualified group of units causes the average of the imputed
[[Page 61495]]
income limitations of the group to exceed 60 percent of AMGI, then the
taxpayer cannot include the 80 percent unit in the otherwise qualified
group. Only the otherwise qualified group of units, without the 80
percent unit, is a qualified group of units used to determine the
project's buildings' applicable fractions.
Once a qualified group of units in a project has been identified
for a taxable year, the applicable fraction for each building in the
project is computed using the units that are in both the qualified
group and the building at issue. (Although the qualified group of units
for a project must have an average limitation no greater than 60
percent of AMGI, this is not true of the average limitation of the
units used to compute the applicable fraction of individual buildings
in the project.) This method of determining a building's applicable
fraction applies both for ascertaining low-income housing credits
earned for a year in the credit period and for complying with the
extended use requirement in section 42(h)(6)(B)(i).
The Treasury Department and the IRS determined that the approach to
determining the applicable fraction in the final regulations better
aligns with the 20-50 and 40-60 set-aside tests than the approach in
the proposed regulations in that it creates parallel requirements for
both ``minimum set-aside units'' and any ``additional units'' that may
contribute to earning low-income housing credits. This rule in the
final regulations is also consistent with the description of the low-
income units and the principle regarding set-aside units and additional
units in the other set-aside tests that is described in the 1986
Conference Report discussion quoted earlier. The rule is also
consistent with comments stating that the low-income units in a project
should have an overall average that does not exceed 60 percent of AMGI.
The potential downside of this approach to an owner is that if one
unit loses low-income status, then it is possible that other units'
status as low-income units may be impacted. Specifically, an owner may
have to exclude one or more otherwise qualifying units from the
qualified group of units for use in applicable fraction determinations
for the group to retain an average income limitation that does not
exceed 60% of AMGI. This, however, will not always be the case. For
example, if a unit designated at 60, 70, or 80 percent of AMGI loses
low-income status and no other changes occurred, then the owner could
maintain the required average limitation of the qualified group of
units without excluding any of the other units from the qualified group
of units that had been taken into account in the previous year. Also,
as is discussed later, in some cases a unit may be included in the
qualified group of units after its income limitation has been
designated or redesignated to a lower income limitation.
5. Proposed Regulations' Special Rule for Determining the Applicable
Fraction for Purposes of Recapture
The proposed regulations, in some cases, would have caused a
compliant low-income unit with a relatively high-income limitation not
to have been taken into account in computing low-income housing credits
earned for a year in the credit period. The mechanisms for achieving
this result were called ``mitigating actions'' and ``removed units''.
To minimize recapture, the proposed regulations would have included
these units in the computations underlying section 42(j) so that the
units' inclusion avoided having their absence contribute to recapture
of credits. As described in section II.B.6. of this Summary of Comments
and Explanation of Revisions, however, the Treasury Department and the
IRS deleted the mitigating actions concept from the final regulations.
For this reason, the final regulations do not include the proposed
regulations' rule related to recapture.
6. Deletion of Mitigating Actions From Final Regulations
As described previously, the proposed regulations would have
created a risk that, in some situations, one unit losing its low-income
status could have caused an entire project to fail the average income
test. To reduce that risk, the proposed regulations described two
possible mitigating actions that a taxpayer could have taken to avoid
disqualifying the project. Because the final regulations differ from
the proposed regulations in a way that avoids that risk, there is no
longer a need for mitigating actions. For this reason, the final
regulations do not include rules related to mitigating actions.
C. Recordkeeping and Reporting Requirements
In response to comments on the proposed rule, the final rule
provides significant flexibility regarding the qualified group of units
used to satisfy the average income set-aside and the qualified group of
units used for purposes of computing the applicable fraction. Providing
the requested flexibility necessitates that the taxpayer have the
discretion and responsibility to make these identifications and that
the contemporary identification of the units be unambiguous.
Specifically, to implement the changes made in response to the
comments on the proposal rule, Sec. 1.42-19(b)(3) of the final
regulations provides that a taxpayer separately identifies (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. Section 1.42-19T(c)(1) of the temporary
regulations requires that this be done by recording these
identifications in the taxpayer's books and records (where the
identification must be retained for a period not shorter than the
record retention requirement under Sec. 1.42-5(b)(2)) and by
communicating that identification annually to the applicable Agency.
These rules promote certainty and administrability. The rules, in
conjunction with the other procedures provided in Sec. 1.42-19T(c)(3),
will allow taxpayers, Agencies, and the IRS to more easily verify the
status, including the average imputed income limitation, of the
qualified group of units used for purposes of satisfying the average
income set-aside and the qualified group of units used for purposes of
determining the applicable fraction(s).
In addition, taxpayers are required to report specified information
to Agencies and to maintain records in sufficient detail to establish
the accuracy of the project's applicable fractions, the satisfaction of
the average income set-aside, and compliance with requirements in
section 42 and the applicable regulations. Section 1.6001-1 requires
the keeping of records ``sufficient to establish the amount of gross
income, deductions, credits, or other matters required to be shown by
such person in any return of such tax or information.'' See Sec. Sec.
1.6001-1 and 1.42-5.
D. Designation of Imputed Income Limitations and Identification of
Units
Section 42(g)(1)(C)(ii) contains substantive requirements for
income limitations applicable in the average income test. Specifically,
the taxpayer must designate the imputed income limitation for each unit
taken into account under the average income test; the average of those
imputed income limitations cannot exceed 60 percent of AMGI; and the
designated imputed income limitation of any unit must be 20, 30, 40,
50, 60, 70, or 80 percent of AMGI. That statutory provision, however,
does not contain procedural requirements to specify the manner in
[[Page 61496]]
which taxpayers must designate the imputed income limitation of units.
Filling this gap, the proposed regulations added procedural
requirements that a taxpayer must designate each imputed income
limitation in accordance with: (1) any procedures established by the
IRS in forms, instructions, or publications or in other guidance
published in the Internal Revenue Bulletin pursuant to Sec.
601.601(d)(2)(ii)(b); and (2) any procedures established by the Agency
that has jurisdiction over the low-income housing project that contains
the units to be designated, to the extent that those Agency procedures
are consistent with IRS guidance and the governing regulations.
No negative comments were submitted regarding these provisions,
but, on review, and in conjunction with other revisions made based on
comments received, the Treasury Department and the IRS determined that
more detailed designation rules were needed to promote certainty and
administrability. Section 1.42-19T(c)(3)(iv) of the temporary
regulations provides that a taxpayer designates a unit's imputed income
limitation by recording the limitation in its books and records, where
it must be retained for a period not shorter than the record retention
requirement under Sec. 1.42-5(b)(2). The final regulations require the
initial designation of a unit to be made no later than when a unit is
first occupied as a low-income unit. See Sec. 1.42-19(c)(3)(i). Under
Sec. 1.42-19T(c)(3)(iv) of the temporary regulations, the designation
must also be communicated annually to the applicable Agency, and the
applicable Agency may establish the time and manner in which
information is provided to it. See Sec. 1.42-19T(c)(2)(i).
In the context of the final regulations' provision of significant
flexibility with respect to satisfying the average income test and
identifying a qualified group of units, these designation and
identification rules will facilitate taxpayer access to this additional
flexibility. Providing a specific method of designation will give
taxpayers more certainty than the proposed regulations as to how to
meet the statutory requirement of designation. The rule will also
benefit administration by ensuring a contemporaneous record of
designation, without creating a significant burden on taxpayers. The
final regulations also revise timing of the designation so that it is
no longer required by the end of the first year of the credit period,
and instead is based on when a unit is first occupied as a low-income
unit. This rule better aligns the timing of designation with the rental
of low-income units and should allow a taxpayer to make designations
after having a chance to evaluate the market for a particular unit.
Finally, requiring annual communication of the information to the
applicable Agency will help the Agency determine whether a project is
in compliance with the requirements of section 42. The temporary
regulations give flexibility to Agencies to determine the best time and
manner for taxpayers to communicate the information so each Agency can
ensure the system best serves that particular Agency with minimal
burden.
Importantly, the temporary regulations also provide Agencies with
the discretion, on a case-by-case basis, to waive in writing any
failure to comply with the temporary regulations' recordkeeping and
reporting requirements. See Sec. 1.42-19T(c)(4). The waiver may be
done up to 180 days after discovery of the failure, whether by taxpayer
or Agency. At the discretion of the applicable Agency, this waiver may
treat the relevant requirements as having been satisfied.
In providing Agencies with the ability to waive and the timeline
for waiving, the Treasury Department and the IRS considered comments
made in response to the proposed regulations regarding the rules for
``removed units'' and the timing for completing ``mitigating actions.''
In response to the proposed regulations' rules on removed units,
Agencies commented that they do not have authority to determine the tax
consequences of noncompliance with respect to the requirements of
section 42, and, instead, Agencies are only responsible for determining
the existence of noncompliance itself. The ability of Agencies to waive
the failure to comply with the procedural requirements provided by the
final regulations is not inconsistent with the scope of Agency
responsibility, and the IRS itself will ultimately determine the tax
consequences of noncompliance.
With respect to timing, many commenters suggested that a 60-day
period in which to take mitigating actions beginning on the first day
after the year of noncompliance was too short and began before the
noncompliance may be known. Commenters recommended various time
periods, and also suggested that the time period run from the time of
discovery of the noncompliance. Although the Agency waiver rule in the
temporary regulations involves a different situation, commenters'
recommendations provide valuable information regarding Agencies' need
for a sufficient period of time to consider whether to grant the waiver
and that this time period should begin when the failure to comply is
discovered. Thus, the temporary regulations provide that the period to
provide a waiver is the 180-day period after discovery of the failure
to comply by taxpayer or Agency.
E. Timing of Designation of Income Limitations
One commenter expressed concern that, in some situations, a
multiple-building project claims the section 42 credit beginning in two
different years depending on when the different buildings in the
project are fully leased, and thus, the credit period for one building
in the project may begin in one taxable year and the credit period for
a second building in the same project may begin during the subsequent
taxable year. In such a situation, the commenter requested, the
regulations should permit the taxpayer to make unit designations at the
end of the respective taxable years in which the credit period begins
for each building in the same project.
The final regulations require a designation of the imputed income
limitation for a unit by the time the unit is first occupied as a low-
income unit, which could take place in different taxable years for
different units. This rule also allows conversion of a market-rate unit
to low-income status, with designation of an income limitation
occurring any time before it is first occupied as a low-income unit.
Thus, the final regulations provide the flexibility that may be needed
by multiple-building projects. In addition, as described later, the
final regulations permit the changing of a unit's imputed income
limitation in certain circumstances. For an unoccupied unit that is
subject to a change in imputed income limitation, the final regulations
provide that the taxpayer must designate the unit's changed imputed
income limitation prior to occupancy of that unit. For an occupied unit
that is subject to a change in imputed income limitation, the taxpayer
must designate the unit's changed imputed income limitation prior to
the end of the taxable year in which the change occurs.
F. Changing a Unit's Imputed Income Designation
1. The Proposed Regulations on Changes to Income Designations
In general, the proposed regulations did not allow income
limitations to be changed after they had been designated.
The preamble to the proposed regulations, however, requested
comments on an alternative mitigating approach for situations in which
a unit
[[Page 61497]]
losing status as a low-income unit had caused the average of unit
limitations to rise above 60 percent of AMGI as of the close of a
taxable year. The mitigating approach would have allowed the taxpayer
to redesignate the imputed income limitation of a low-income unit to
return the average of unit limitations to 60 percent of AMGI or lower.
2. Comments Seeking Ability To Change Designations
Numerous commenters disagreed with the proposed regulations'
disallowance of modifying the designated imputed income limitation of a
unit. In general, these commenters stressed that greater flexibility to
change unit designations would align with what multiple Agencies had
been pursuing to implement existing State and local policies. Some
commentators observed that the proposed regulations may conflict with
other Federal or State laws or programs that, in certain cases, require
rental housing to accommodate a tenant's need to move to another unit.
Additionally, some commentators noted that after enactment of section
42(g)(1)(C), some Agencies adopted their own guidance with which the
subsequently published proposed regulations were in conflict.
Multiple commenters recommended that the final regulations allow
taxpayers to modify unit designations if the Agency with jurisdiction
over the project at issue allows for that in its policies and the
Agency consents to the change. A different commenter suggested that the
final regulations should allow taxpayers to adjust imputed income
limitation designations over time, provided that the taxpayer's
adjusted designations continue to satisfy the requirements of the
average income test (that is, at all times 40 percent of the units
remain rent-restricted and occupied by tenants whose income does not
exceed the imputed income limitation designated by the owner, and the
average of the imputed income limitation designations does not exceed
60 percent of AMGI in any given year).
3. Final Regulations on Changing Designations of Income Limitations
The Treasury Department and the IRS agree with taxpayers that the
final regulations should allow greater flexibility in changes in unit
designations than the proposed regulations did. Because not all
Agencies may want the exact same standards for permitting
redesignations, the final regulations address these taxpayer concerns
by providing Agencies significant flexibility in determining
procedures.
Under the final regulations, a taxpayer may change the imputed
income limitation designation of a previously designated low-income
unit in any of the following circumstances:
(1) In accordance with any procedures established by the IRS in
forms, instructions, or guidance published in the Internal Revenue
Bulletin pursuant to Sec. 601.601(d)(2)(ii)(b) of this chapter.
(2) In accordance with an Agency's publicly available written
procedures, if those procedures are available to all of the Agency's
projects that have elected the average income test.
(3) To enhance protections set forth in the Americans With
Disabilities Act of 1990 (ADA), Public Law 101-336, 104 Stat. 328; the
Fair Housing Amendments Act of 1988, Public Law 100-430, 102 Stat.
1619; the Violence Against Women Act of 1994, Public Law 103-322, 108
Stat. 1902; the Rehabilitation Act of 1973, Public Law 93-112, 87 Stat.
394; or any other State, Federal, or local law or program that protects
tenants and that is identified by the IRS or an Agency in a manner
described in (1) or (2) above. The tenant protections that apply to an
average-income project and that redesignation may enhance do not
necessarily have any specific connection to section 42. For example,
the protections may be ones that apply to all multifamily rental
housing, or they may apply to the project at issue because some
congressionally authorized spending supported the project with Federal
financial assistance. Even if a tenant protection does not legally
apply to a particular average-income project but does apply to
analogous multifamily rental housing, the owner of the project may
redesignate income limitations to implement the protection for the
project's residents.
(4) To enable a current income-qualified tenant to move to a
different unit within a project keeping the same income limitation (and
thus the same maximum gross rent), with the newly occupied unit and the
vacated unit exchanging income limitations.
(5) To restore the required average income limitation for purposes
of identifying a qualified group of units either for purposes of
satisfying the average income set-aside or for purposes of identifying
the units to be used in computing applicable fraction(s). This rule is
limited to newly designated, or redesignated, units that are vacant or
are occupied by a tenant that would satisfy the new, lower imputed
income limitation.
Also, the temporary regulations provide that a taxpayer effects a
change in a unit's imputed income limitation by recording the
limitation in its books and records, where it must be retained for a
period not shorter than the record retention requirement under Sec.
1.42-5(b)(2). See Sec. 1.42-19T(d)(2). The new designation must also
be communicated to the applicable Agency in the time and manner
required by the applicable Agency and must become part of the annual
report to the Agency of income designations. As part of its discretion
to specify the manner of communicating the new designation, the Agency
may, if it wishes, require identification of the justification for the
redesignation. The prior designation must be retained in the books and
records for the period specified in Sec. 1.42-19T(c)(3)(iv). These
requirements for redesignations are consistent with those for initial
designation of a unit's imputed income limitation and, similarly, are
intended to increase both certainty and administrability with respect
to redesignations.
G. Applicability Dates
Three commenters recommended that the final regulations should
provide relief for projects that have elected the average income
minimum set-aside prior to the publication of the final rule. These
commenters suggested that taxpayers that elected the average income
test before the finalization of the regulations did so based on a set
of expectations that may be in conflict with how the final regulations
actually work. For example, one commenter stated that the final
regulations should provide taxpayers the opportunity to choose a
different minimum set-aside.
Section 42 provides that an election of a minimum set-aside is
irrevocable. Therefore, these final regulations do not permit taxpayers
to change a minimum set-aside election.
In general, the final regulations apply to taxable years beginning
after December 31, 2022. Section 1.42-19(f)(2) provides rules for
residential units in projects that were already occupied prior to the
applicability date of the regulations. The final regulations in both
Sec. Sec. 1.42-15(i)(2) and 1.42-19(f)(3) also contain provisions that
makes them more broadly available for taxpayers that desire their
application. For taxable years prior to the first taxable year to which
these regulations apply, taxpayers may rely on a reasonable
interpretation of the statute in implementing the average income test
for taxable years to which these regulations do not apply.
H. Good Cause
For the reasons discussed above, the Treasury Department and the
IRS consider the recordkeeping and
[[Page 61498]]
reporting requirements contained in the temporary regulations to be a
logical outgrowth of the proposed rule. In any event, the Treasury
Department and the IRS determine that there would be good cause to
issue the temporary regulations contained in this Treasury Decision
without additional notice and the opportunity for public comment. This
action may be taken pursuant to section 553(b)(3)(B) of the
Administrative Procedure Act, which provides that advance notice and
the opportunity for public comment are not required with respect to a
rulemaking when an ``agency for good cause finds (and incorporates the
finding and a brief statement of reasons therefor in the rules issued)
that notice and public procedure thereon are impracticable,
unnecessary, or contrary to the public interest.'' Under the ``public
interest'' prong of 5 U.S.C. 553(b)(3)(B), the good cause exception
appropriately applies where notice-and-comment would harm, defeat, or
frustrate the public interest, rather than serving it.
It would frustrate the public interest to delay the applicability
date of the regulations until the recordkeeping and reporting
requirements have received additional notice and comment. Taxpayers are
seeking to rely on the substantive final regulations as soon as
possible, and taxpayers cannot do so prior to the applicability date of
the requirements in the temporary regulations. In general, these
substantive final regulations provide significant flexibility with
respect to satisfying the average income test, identifying a qualified
group of units for use in the average income set-aside test and
applicable fraction determinations, and changing the imputed income
limitation designations of residential units. This increased
flexibility was in response to taxpayer comments on the proposed
regulations, including taxpayer complaints about burdens in the
proposed regulations. The increased regulatory flexibility, in turn,
necessitates these recordkeeping and reporting requirements to enhance
administrability and certainty for the taxpayers and Agencies that will
be taking advantage of the flexibility. In addition, these requirements
are minimally burdensome. The recordkeeping requirements are similar to
existing recordkeeping requirements for low-income housing projects,
and Agencies may specify the time and manner of communication of
regulatorily required information and may waive any failure to comply.
There is also good cause to find notice is ``unnecessary'' within
the meaning of 5 U.S.C. 553(b)(3)(B). The Treasury Department and the
IRS are responding to commenters by providing the flexibility they
sought, which requires enhanced tracking to prevent abuse. The
recordkeeping additions do not alter the substance of the basic rule
provisions, which are a logical outgrowth of the NPRM. And because the
recordkeeping requirements provide what is minimally necessary to
ensure compliance and oversight, soliciting further comment would not
alter these minimal recordkeeping requirements.
Accordingly, the Treasury Department and IRS have determined that
notice is unnecessary and that it is in the public interest to allow
expedited reliance on the recordkeeping and reporting requirements
contained in the temporary regulations. At the same time, as set forth
above, the Treasury Department and IRS are soliciting comments on the
recordkeeping and reporting requirements in the notice of proposed
rulemaking published contemporaneously with this final rule. At the
time of publication, the Office of Management and Budget (OMB) has
considered and approved these recordkeeping and reporting requirements
under the Paperwork Reduction Act so that taxpayers can rapidly access
the flexibility provided in these final regulations regarding the
average income test.
Special Analyses
Regulatory Planning and Review--Economic Analysis
Executive Orders 12866 and 13563 direct agencies to assess costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). Executive Order 13563
emphasizes the importance of quantifying both costs and benefits, of
reducing costs, of harmonizing rules, and of promoting flexibility.
These final regulations have been designated as subject to review
under Executive Order 12866 pursuant to the Memorandum of Agreement
(April 11, 2018) (MOA) between the Treasury Department and the Office
of Management and Budget (OMB) regarding review of tax regulations. The
Office of Information and Regulatory Affairs has designated these final
regulations as significant under section 1(b) of the MOA.
A. Background
The Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085,
created the low-income housing credit under section 42 of the Code.
Section 42(a) provides that the credit amount earned by a qualified
low-income building depends on the number of low-income units in the
building, among other factors. Among other requirements, a low-income
unit as defined in section 42(i)(3) must be rent-restricted, and the
individuals occupying the unit must meet the income limitation
applicable to the project of which the building is a part.
To qualify as a low-income housing project, one of the section
42(g) minimum set-aside tests, as elected by the taxpayer, must be
satisfied. Prior to the enactment of the Consolidated Appropriations
Act of 2018, Public Law 115-141, 132 Stat. 348 (2018 Act), section
42(g) set forth two minimum set-aside tests, known as the 20-50 test
and the 40-60 test. Under the 20-50 test, at least 20 percent of the
residential units in the project must be both rent-restricted and
occupied by tenants whose gross income is 50 percent or less of AMGI.
Under the 40-60 test, at least 40 percent of the residential units in
the project must be both rent-restricted and occupied by tenants whose
gross income is 60 percent or less of AMGI. To be rent restricted, a
unit must have maximum gross rent no more than 30 percent of the unit's
income limitation.
The 2018 Act added section 42(g)(1)(C), which contains a third
minimum set-aside test--the average income test. A project meets the
minimum requirements of the average income test if 40 percent or more
of the residential units in the project are both rent-restricted and
occupied by tenants whose income does not exceed the imputed income
limitation designated by the taxpayer with respect to the specific
unit. (In the case of a project described in section 142(d)(6), 40
percent in the preceding sentence is replaced by 25 percent.) For a
project to meet the average income test, among other criteria, the
average of the imputed income limitations must not exceed 60 percent of
AMGI.
B. Baseline
The Treasury Department and the IRS have assessed the benefits and
costs of these final regulations relative to a no-action baseline
reflecting anticipated Federal income tax-related behavior in the
absence of these regulations.
C. Economic Analysis
These final regulations provide guidance on the average income test
[[Page 61499]]
under section 42(g)(1)(C). Despite the absence of this guidance,
between 2018 and 2022 approximately 200 taxpayers elected the average
income test for projects containing, in the aggregate, just over 2,000
buildings. With the benefit of this guidance, we project that an
additional 100 taxpayers will elect the average income test annually,
for around 1,000 buildings in aggregate, relative to a baseline
scenario of no guidance.
These final regulations are expected to increase election of the
average income test because the regulations will reduce uncertainty
regarding the interpretation of 42(g)(1)(C). Absent these regulations,
some taxpayers might shy away from the average income test, fearing
adverse tax consequences if their interpretation of the statute is
determined to be incorrect as well as lost time and expense for
litigation, even if their interpretation is eventually confirmed.
Instead, these or other taxpayers would elect either the 20-50 test or
the 40-60 test.
Projects electing the average income test may be more financially
stable and more likely to be mixed income than if they had to rely on
the 20-50 or 40-60 tests; however, in aggregate, the final regulations
are expected to have essentially no immediate effect on the number of
affordable housing units produced. The pool of potential low-income
housing credits allocated by state housing agencies is capped annually
and is generally oversubscribed. Thus any increase in allocated credits
flowing to projects electing the average income test is expected to be
offset by a concomitant reduction in credits flowing to projects
electing one of the other two set-aside tests.
Despite having no measurable impact on the stock of affordable
housing, these final regulations will likely have some economic effect.
First, there will likely be a minor efficiency gain to taxpayers
electing the average income set-aside compared to the situation of
taxpayers that, in the absence of this guidance, would experience
uncertainty interpreting section 42(g)(1)(C). These taxpayers may save
on consulting fees or hours of effort. Second, there may be a minor
efficiency gain from avoiding time spent in litigation regarding the
interpretation of section 42(g)(1)(C). These are unambiguous benefits
of providing the final regulations, even if quantitatively small.
Third, there may be costs associated with the record-keeping
requirements of these final regulations. In Section II of these Special
Analyses, we estimate that the annual paperwork burden for this
regulation is $676,712 in aggregate. These costs fall upon low-income
housing tax credit (LIHTC) building owners who choose to incur them
when electing the average income test.
Less directly, the final regulations will likely result in a
marginal geographic redistribution in the location of LIHTC-supported
housing, away from densely populated areas and towards more sparsely
populated ones. Absent an option to elect the average income test,
property owners seeking LIHTCs must rely on either the 20-50 or 40-60
tests. These tests set a single income standard for all LIHTC-
generating units in a building. For a building to be financially
feasible, its owners must be confident that there is a sufficiently
large pool of potential renters having incomes in these relatively
narrow ranges (just under 50 or 60 percent of AMGI). These conditions
are more easily met in densely populated areas.
In contrast, with income averaging, developers have leeway to
establish a variety of income limitations in a building. Thus, in a
sparsely populated area where there are not enough people in the
relatively narrow required range of incomes to support a 20-50 or 40-60
building, an average income building may be financially feasible.
Despite the low population density, the wider range of potential tenant
incomes may enable the building owner to fill the low-income units with
qualifying tenants from that vicinity. That ability could make the
difference in whether or not the project is feasible.
To be sure, most of the effect of the average income test on the
geographic distribution of affordable housing is a direct consequence
of statutory amendments to section 42 made by the 2018 Act, independent
of this regulatory guidance. However, to the extent that the final
regulations encourage some taxpayers to use the average income test who
otherwise would not, the regulations reinforce the statutory effect.
The end result is a marginal transfer of economic well-being from
renters and LIHTC property developers in densely populated areas
towards renters and LIHTC property developers in sparsely populated
areas.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
requires that a Federal agency obtain the approval of OMB before
collecting information from the public, whether such collection of
information is mandatory, voluntary, or required to obtain or retain a
benefit. The collections of information contained in these regulations
has been approved by OMB under control number 1545-0988.
The collections of information that are needed for certainty and
administrability of the final regulations are included in Sec. 1.42-
19T of the temporary regulations. Section 1.42-19T(c)(1) provides
recordkeeping and reporting requirements related to the identification
of a qualified group of units for each of (i) satisfaction of the
average income set-aside test and (ii) applicable fraction
determinations. Section 1.42-19T(c)(2) provides reporting requirements
to the Agency with jurisdiction over a project. Section 1.42-
19T(c)(3)(iv) provides recordkeeping and reporting requirements related
to designations of the imputed income limitations for residential
units. Section 1.42-19T(d)(2) provides recordkeeping and reporting
requirements related to changing a unit's designated imputed income
limitation.
This information in the collections of information will generally
be used by the IRS and Agencies for tax compliance purposes and by
taxpayers to facilitate proper reporting and compliance. Specifically,
the collections of information in Sec. 1.42-19T apply to taxpayer
owners of projects that receive the low-income housing credit and elect
the average income set-aside. With respect to the recordkeeping
requirements in Sec. 1.42-19T(c)(3)(iv) and (d)(2) and section
42(g)(1)(C)(ii)(I) requires that the taxpayer designate the imputed
income limitations of the units taken into account for purposes of the
average income test. Thus, the recordkeeping requirements that are
provided allow for a process of designation that will result in a
reliable record of both the original designations of the imputed income
limitations of low-income units and any redesignations of units'
limitations within a project.
The recordkeeping rules in Sec. 1.42-19T(c)(1) with respect to a
qualified group of units are similarly needed to ensure there is a
reliable record to show that the units used for purposes of the average
income set-aside test, and for determining a building's applicable
fraction were part of a group of units within the project whose average
designated imputed income limitations do not exceed 60 percent of AMGI.
This limitation is consistent with the requirement in section
42(g)(1)(C)(ii)(II). The annual reporting requirements in Sec. 1.42-
19T(c)(1) and (3) and (d)(2) are also similar in substance to other
annual certifications required of taxpayers. For example, minimum
certifications by taxpayers are required in qualified
[[Page 61500]]
allocation plans as provided in Sec. 1.42-5(c). The reporting
requirements in these final regulations also provide added flexibility
by allowing the applicable Agency to determine the time and manner that
the reporting is made under Sec. 1.42-19T(c)(2)(i). Also, Sec. 1.42-
19T(c)(4) gives Agencies the ability to waive any failure of reporting
on a case-by-case basis.
A summary of paperwork burden estimates follows:
Estimated number of respondents: Approximately 200 taxpayers
elected the average income test for just over 2,000 buildings between
2018 and 2022. When viewed annually, we project that approximately 100
additional taxpayers will have eligible buildings and 1,000 additional
buildings will be eligible under the average income test.
Estimated burden per response: We estimate that identifying which
units are for use in the average income set-aside test and applicable
fraction determinations and designating a unit's imputed income
limitation takes an average of 15 minutes per unit. Based on an
estimated average of 15 units per building and an average 15 minutes of
time per unit, an impacted taxpayer will incur an average of 225
minutes per building to record the additional designations due to the
flexibility under the regulations for the average income test. Total
average annual burden for recording the designations per building is
11,250 hours (15 units x 15 minutes x 3,000 buildings).
Taxpayers are also required to report redesignation of units, and
why they are required to redesignate units during the year. For
purposes of this analysis, we assume that an average of 4 units per
building will be redesignated annually. We estimate each redesignation
will take an average of 10 minutes. Thus, we estimate the average
number of minutes per year to record redesignations for an impacted
taxpayer to be 40 minutes per building for a total average annual
burden of 2,000 hours (40 minutes x 3,000 buildings).
In addition, we estimate an annual reporting burden related to the
expanded flexibility rules to average 20 minutes per impacted taxpayer
for a total burden of 100 hours (20 minutes x 300 taxpayers).
Estimated frequency of response: Annual.
Estimated total burden hours: The annual burden hours for this
regulation is estimated to be 13,350 hours. Using a monetization rate
of $50.69 per hour (2020 dollars), the burden for this regulation is
$676,712 for impacted taxpayers.
A Federal agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless the
collection of information displays a valid control number.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter
6), it is hereby certified that this final regulation will not have a
significant economic impact on a substantial number of small entities.
This certification is based on the fact that, prior to the publication
of this final regulation and before the enactment of the 2018 Act,
taxpayers were already required to satisfy either the 20-50 test or the
40-60 test, as elected by the taxpayer, in order to qualify as a low-
income housing project. The 2018 Act added a third minimum set-aside
test (the average income test) that taxpayers may elect. This final
regulation sets forth requirements for the average income test, and the
costs associated with the average income test are similar to the costs
associated with the 20-50 test and 40-60 test. In addition, affected
taxpayers, including some who end up not electing the average income
test) will incur minimal costs in reading and understanding the
regulations. The Treasury Department and the IRS estimate that the
burden involved in reading and understanding the regulations will be
approximately 3 to 5 hours and largely will be borne by advisors and
trade media. A portion of the cost to such advisors and trade media
will be passed on to taxpayers.
As described in more detail in the Paperwork Reduction Act section
of this preamble, approximately 200 taxpayers elected the average
income test between 2018 and 2022. When that figure is viewed annually,
the Treasury Department and the IRS project that approximately 100
additional taxpayers will elect the average income test due to the
final regulations. For the 300 taxpayers affected, the annual burden
hours for this regulation is estimated in the Paperwork Reduction Act
analysis to be 13,350 hours. Thus, the average annual burden hours
amount to 44.5 hours per affected small entity. This estimate reflects
all recordkeeping and reporting requirements associated with the final
regulations, including (i) identifying which units are for use in the
average income set-aside test, (ii) identifying which units are for use
in applicable fraction determinations, (iii) designating a unit's
imputed income limitation, (iv) reporting redesignation of units, (v)
reporting reasons why units are redesignated, and (v) the reporting
burden related to the expanded flexibility rules.
Monetized at $50.69 per hour (2020 dollars), the average annual
burden hours represent a cost of $2,256 per affected small entity. This
amount is likely quite small relative to the entity's revenue. A
precise estimate of typical revenue is not possible with the data
available to the Treasury Department and the IRS. However, the Treasury
Department and the IRS estimate that the typical annual LIHTC
allocation to an affected entity is between $125,000 and $1,450,000.
Relative to these sums, the $2,256 annual cost of the regulations is
not a significant economic impact.
Accordingly, it is hereby certified that these regulations will not
have a significant economic impact on a substantial number of small
entities within the meaning of section 601(6) of the RFA.
For the applicability of the RFA to the temporary regulations,
refer to the Special Analyses section of the preamble to the notice of
proposed rulemaking published in the Proposed Rules section in this
issue of the Federal Register.
IV. Section 7805(f)
Pursuant to section 7805(f), the proposed regulation was submitted
to the Chief Counsel for Advocacy of the Small Business Administration
for comment on its impact on small business, and no comments were
received. The Treasury Department and the IRS also requested comments
from the public.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. This final rule does not include any Federal mandate that
may result in expenditures by State, local, or tribal governments, or
by the private sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These regulations do
[[Page 61501]]
not have federalism implications and do not impose substantial direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
VII. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this rule
as not a ``major rule,'' as defined by 5 U.S.C 804(2).
Drafting Information
The principal authors of these regulations are Dillon Taylor,
Office of the Associate Chief Counsel (Passthroughs and Special
Industries), and Michael J. Torruella Costa, formerly at Office of the
Associate Chief Counsel (Passthroughs and Special Industries). However,
other personnel from the Treasury Department and the IRS participated
in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding in
numerical order entries for Sec. Sec. 1.42-19 and 1.42-19T to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.42-15 also issued under 26 U.S.C. 42(n);
* * * * *
Section 1.42-19 also issued under 26 U.S.C. 42(n);
Section 1.42-19T also issued under 26 U.S.C. 42(n);
* * * * *
0
Par. 2. Section 1.42-0 is amended by:
0
1. In the introductory text, removing ``1.42-18'' and adding ``1.42-
19'' in its place.
0
2. In Sec. 1.42-15:
0
i. Revising paragraph (c).
0
ii. Adding paragraphs (c)(1) and (2) and (c)(2)(i) through (iv).
0
iii. Revising paragraph (i).
0
iv. Adding paragraphs (i)(1) and (2).
0
3. Adding a heading and entries for Sec. 1.42-19.
The additions and revisions read as follows:
Sec. 1.42-0 Table of contents.
* * * * *
Sec. 1.42-15 Available unit rule.
* * * * *
(c) Exceptions.
(1) In general.
(2) Rental of next available unit in case of the average income
test.
(i) Basic rule.
(ii) No requirement to comply with the next available unit rule in
a specific order.
(iii) Deep rent skewed projects.
(iv) Limitation.
* * * * *
(i) Applicability dates.
(1) In general.
(2) Applicability dates under the average income test.
* * * * *
Sec. 1.42-19 Average income test.
(a) Average income set-aside.
(b) Definition of low-income unit and qualified group of units.
(1) Definition of low-income unit.
(2) Definition of qualified group of units.
(3) Identification of qualified groups of units.
(i) Average income set-aside test.
(ii) Applicable fraction determinations.
(iii) Identification of units.
(c) Procedures.
(1) [Reserved]
(2) [Reserved]
(3) Designation of imputed income limitations.
(i) Timing of designation.
(ii) 10-percent increments.
(iii) Continuity.
(iv) [Reserved]
(4) [Reserved]
(d) Changing a unit's designated imputed income limitation.
(1) Permitted changes.
(i) Federally permitted changes.
(ii) Housing credit agency (Agency)-permitted changes.
(iii) Certain laws.
(iv) Tenant movement.
(v) Restoring compliance with average income requirements.
(2) [Reserved]
(e) Examples.
(f) Applicability dates.
(1) General rule.
(2) Designations of occupied units.
(3) Applicability of this section to taxable years beginning before
January 1, 2023.
0
Par. 3. Section 1.42-15 is amended by:
0
1. Revising the definition of Over-income unit in paragraph (a).
0
2. In paragraph (c):
0
i. Revising the heading.
0
ii. Designating the text as paragraph (c)(1) and adding a heading for
newly designated paragraph (c)(1).
0
3. Adding paragraph (c)(2).
0
4. In paragraph (i):
0
i. Revising the heading.
0
ii. Designating the text as paragraph (i)(1).
0
5. In newly designated paragraph (i)(1):
0
i. Adding a heading.
0
ii. Removing ``This section'' and adding ``Except for paragraph (c)(2)
of this section, this section'' in its place.
0
6. Adding paragraph (i)(2).
The revisions and additions read as follows:
Sec. 1.42-15 Available unit rule.
(a) * * *
Over-income unit means, in the case of a project with respect to
which the taxpayer elects the requirements of section 42(g)(1)(A) or
(B) (that is, the 20-50 or 40-60 tests), a low-income unit in which the
aggregate income of the occupants of the unit increases above 140
percent of the applicable income limitation under section 42(g)(1)(A)
and (B), or above 170 percent of the applicable income limitation for
deep rent skewed projects described in section 142(d)(4)(B). In the
case of a project with respect to which the taxpayer elects the
requirements of section 42(g)(1)(C) (that is, the average income test),
over-income unit means a residential unit described in Sec. 1.42-
19(b)(1)(i) through (iii) in which the aggregate income of the
occupants of the unit increases above 140 percent (170 percent in case
of deep rent skewed projects described in section 142(d)(4)(B)) of the
greater of 60 percent of area median gross income or the imputed income
limitation designated with respect to the unit under Sec. 1.42-19(b).
* * * * *
(c) Exceptions--(1) In general. * * *
(2) Rental of next available unit in case of the average income
test--(i) Basic rule. In the case of a project with respect to which
the taxpayer elects the average income test, if a unit becomes an over-
income unit within the meaning of paragraph (a) of this section, that
unit ceases to be described in Sec. 1.42-19(b)(1)(ii) if--
(A) Any residential rental unit (of a size comparable to, or
smaller than, the over-income unit) is available, or subsequently
becomes available, in the same low-income building; and
(B) That available unit is occupied by a new resident whose income
exceeds the limitation described in paragraph (c)(2)(iv) of this
section.
(ii) No requirement to comply with the next available unit rule in
a specific order. Where multiple units in a building are over-income
units at the same time--
(A) The order in which available units are occupied makes no
difference for
[[Page 61502]]
purposes of complying with the rules in this section (next available
unit rule); and
(B) In making imputed income limitation designations, the taxpayer
must take into account the limitations described in paragraphs
(c)(2)(iii) and (iv) of this section.
(iii) Deep rent skewed projects. In the case of a project described
in section 142(d)(4)(B) with respect to which the taxpayer elects the
average income test, if a unit becomes an over-income unit within the
meaning of paragraph (a) of this section, that unit ceases to be a unit
described in Sec. 1.42-19(b)(1)(ii) if--
(A) Any residential unit described in Sec. 1.42-19(b)(1)(i)
through (iii) is available, or subsequently becomes available, in the
same low-income building; and
(B) That unit is occupied by a new resident whose income exceeds
the lesser of 40 percent of area median gross income or the imputed
income limitation designated with respect to that unit.
(iv) Limitation. The limitation described in this paragraph
(c)(2)(iv) is--
(A) In the case of a unit that was described in Sec. 1.42-
19(b)(1)(i) through (iii) prior to becoming vacant, the imputed income
limitation designated with respect to the available unit for the
average income test under Sec. 1.42-19(b); and
(B) In the case of any other unit, the highest imputed income
limitation that could be designated (consistent with section
42(g)(1)(C)(ii)(III)) for that available unit under Sec. 1.42-19(c)
such that the average of all imputed income designations of residential
units in the project does not exceed 60 percent of area median gross
income (AMGI).
(v) Example. The operation of paragraph (c)(2) of this section
(that is, the next available unit rule for the average income test) is
illustrated by the following example.
(A) Facts. (1) A single-building housing project received an
allocation of housing credit dollar amount for 10 low-income units. The
taxpayer who owns the project constructs the building with 10
identically sized units and elects the average income test. In the
first year, the taxpayer intended to have 8 units that will qualify as
low-income units (within the meaning of Sec. 1.42-19(b)(1)), and 2
units that are market-rate units. The taxpayer properly and timely
designates the imputed income limitations for the 8 units as follows: 4
units at 80 percent of AMGI; and 4 units at 40 percent of AMGI.
Table 1 to Paragraph (c)(2)(v)(A)(1)
------------------------------------------------------------------------
Imputed income limitation of the
Unit No. unit
------------------------------------------------------------------------
1................................... 80 percent of AMGI.
2................................... 80 percent of AMGI.
3................................... 80 percent of AMGI.
4................................... 80 percent of AMGI.
5................................... Market Rate.
6................................... 40 percent of AMGI.
7................................... 40 percent of AMGI.
8................................... 40 percent of AMGI.
9................................... 40 percent of AMGI.
10.................................. Market Rate.
------------------------------------------------------------------------
(2) In the first taxable year of the credit period (Year 1), the
project is fully leased and occupied by income-qualified residents in
Units ##1-4 and 6-9. In Year 2, Unit #1 and Unit #6 become over-income.
The tenant residing in Unit #5 vacated that unit. Taxpayer then
designated an imputed income limitation of 40 percent of AMGI for Unit
#5. Later in Year 2, the tenant residing in Unit #10 vacated that unit.
Taxpayer designated an imputed income limitation of 80 percent of AMGI
for Unit #10. After those designations, Unit #10 was occupied by a new
income-qualified tenant, and then later, Unit #5 was occupied by a new
income-qualified resident.
(B) Analysis. Taxpayer sought to maintain the status of the over-
income units (Unit #1 and Unit #6) as units described in Sec. 1.42-
19(b)(1)(ii). As the then-market rate units (Units ##5 and 10) became
available to rent, Taxpayer designated imputed income limitations for
them at 40 percent and 80 percent of AMGI, respectively. Immediately
after each designation, the average of the designations in the project
does not exceed 60 percent AMGI. Pursuant to the rule in paragraph
(c)(2)(ii) of this section, when there are multiple over-income units,
Taxpayer is not required to rent the next-available units in a specific
order, even though they may have different imputed income limitations.
Thus, Taxpayer complied with the rules of the next available unit rule,
and Unit #1 and Unit #6 maintain status as units described in Sec.
1.42-19(b)(1)(ii).
* * * * *
(i) Applicability dates--(1) In general. * * *
(2) Applicability dates under the average income test. The
requirements of the second sentence of the definition of over-income
unit in paragraph (a) of this section and paragraph (c)(2) of this
section apply to taxable years beginning after December 31, 2022. A
taxpayer may choose to apply this section to a taxable year beginning
after October 12, 2022, and before January 1, 2023, provided that the
taxpayer chooses to apply Sec. 1.42-19 to the same taxable year.
0
Par. 4. Section 1.42-19 is added to read as follows:
Sec. 1.42-19 Average income test.
(a) Average income set-aside. A project for residential rental
property satisfies the average income test in section 42(g)(1)(C) for a
taxable year if the project contains a qualified group of units (within
the meaning of paragraph (b)(2) of this section) that constitutes 40
percent or more of the residential units in the project. (In the case
of a project described in section 142(d)(6), ``40 percent'' in the
preceding sentence is replaced with ``25 percent.'')
(b) Definition of low-income unit and qualified group of units--(1)
Definition of low-income unit. For purposes of this section, a
residential unit is a low-income unit if and only if -
(i) Such unit is rent-restricted (as defined in section 42(g)(2));
(ii) The individuals occupying such unit satisfy the imputed income
limitation of that unit designated by the taxpayer in accordance with
paragraphs (c)(3) and (d) of this section and with Sec. 1.42-19T(c)
and (d), or the unit meets the requirements under section 42(g)(2)(D);
(iii) No provision in section 42 (including section 42(i)(3)(B)-
(E)) or in the regulations under section 42 denies low-income status to
that unit; and
(iv) The unit is part of a qualified group of units under paragraph
(b)(2) of this section.
(2) Definition of qualified group of units. A group of residential
units is a qualified group of units for a taxable year if and only if--
(i) Each unit in the group satisfies the requirements of paragraphs
(b)(1)(i) through (iii) of this section; and
(ii) The average of the imputed income limitations of all of the
units in the group does not exceed 60 percent of area median gross
income (AMGI).
(3) Identification of qualified groups of units--(i) Average income
set-aside test. For each taxable year in the extended use period, the
taxpayer must identify a qualified group of units that constitute 40
percent or more of the residential units in the project. The
requirements in paragraph (b)(3)(iii) of this section apply to these
identifications.
(ii) Applicable fraction determinations. For each taxable year in
the extended use period, the taxpayer must identify a qualified group
of units to be used in determining the applicable fractions for the
buildings in the project.
[[Page 61503]]
(A) Identification of the units in the qualified group of units
used for determining applicable fractions. The residential units that
are identified for purposes of this paragraph (b)(3)(ii) include the
units that, under paragraph (b)(3)(i) of this section, are included in
the qualified group of units identified for purposes of the set-aside
qualification of the project. The taxpayer may identify additional
units for inclusion in the group of units used in determining the
applicable fractions for buildings in the project provided that the
resulting group is a qualified group of units within the meaning of
paragraph (b)(2) of this section.
(B) Computing applicable fractions of buildings. For a taxable
year, the applicable fraction of a building in a project is computed
using the units that are in the particular building and that are also
in the qualified group of units for the project identified for purposes
of this paragraph (b)(3)(ii). The units included in the applicable
fraction of a building do not have to be a qualified group of units on
their own. See Example 4 of paragraph (e) of this section.
(iii) Identification of units. The recordkeeping and reporting
requirements in Sec. 1.42-19T(c)(1) apply both to the identification
of units that is required by paragraph (b)(3)(i) of this section and
the identification of units that is described in paragraph (b)(3)(ii)
of this section.
(c) Procedures. (1)-(2) [Reserved]
(3) Designation of imputed income limitations--(i) Timing of
designation. (A) Before a unit is first occupied as a low-income unit,
or, except as provided in paragraph (c)(3)(i)(B) of this section, is
first occupied under a changed income limit, the taxpayer must
designate the unit's imputed income limitation or changed imputed
income limitation.
(B) For an occupied unit that is subject to a change in imputed
income limitation pursuant to paragraph (d) of this section, the
taxpayer must designate the unit's changed imputed income limitation
not later than the end of the taxable year in which the change occurs.
(ii) 10-percent increments. Under section 42(g)(1)(C)(ii)(III), a
designation is valid only if it is one of the following: 20 percent, 30
percent, 40 percent, 50 percent, 60 percent, 70 percent, or 80 percent
of AMGI.
(iii) Continuity. Except as provided in paragraph (d) of this
section, the imputed income limitation of a residential unit does not
change.
(iv) [Reserved]
(4) [Reserved]
(d) Changing a unit's designated imputed income limitation--(1)
Permitted changes. Notwithstanding paragraph (c)(3)(iii) of this
section, the taxpayer may change the imputed income limitation of a
unit in the following circumstances subject to the timing of
designation requirement in paragraph (c)(3)(i)(B) of this section.
(i) Federally permitted changes. Permission for the change is
contained in IRS forms, instructions, or guidance published in the
Internal Revenue Bulletin pursuant to Sec. 601.601(d)(2)(ii)(b) of
this chapter.
(ii) Housing credit agency (Agency)-permitted changes. The Agency
with jurisdiction of the project has issued public written guidance
that provides conditions for a permitted change and that applies to all
average income test projects under the jurisdiction of the Agency.
(iii) Certain laws. The change in designation is required or
appropriate to enhance protections contained in the following, as
amended--
(A) The Americans with Disabilities Act of 1990 (ADA), Pub. L. 101-
336, 104 Stat. 328, 42 U.S.C. 12101, et seq.;
(B) The Fair Housing Amendments Act of 1988, Pub. L. 100-430, 102
Stat.1619, 42 U.S.C. 3601, et. seq.;
(C) The Violence Against Women Act of 1994, Pub. L. 103-322, 108
Stat. 1902, 34 U.S.C. 12291, et. seq.;
(D) The Rehabilitation Act of 1973, Pub. L. 93-112, 87 Stat. 394,
29 U.S.C. 701, et seq.; or
(E) Any other State, Federal, or local law or program that protects
tenants and that is identified pursuant to paragraph (d)(1)(i) or (ii)
of this section.
(iv) Tenant movement. If a current income-qualified tenant moves to
a different unit in the project--
(A) The unit to which the tenant moves has its imputed income
designation, if any, changed to the limitation of the unit from which
the tenant is moving; and
(B) The vacated unit takes on the prior limitation, if any, of the
tenant's new unit.
(v) Restoring compliance with average income requirements. If one
or more units lose low-income status or if there is a change in the
imputed income limitation of some unit and if either event would cause
a previously qualifying group of units to cease to be described in
paragraph (b)(2)(ii) of this section, then the taxpayer may designate
an imputed income limitation for a market rate unit or may reduce the
existing imputed income limitations of one or more other units in the
project in order to restore compliance with the average income
requirement. The rule in this paragraph (d)(1)(v) may be applied to
market-rate, vacant, or low-income units, but, in the case of occupied
units, the current tenants must qualify under the new, lower imputed
income limitation.
(2) [Reserved]
(e) Examples. The operation of this section is illustrated by the
following examples.
(1) Example 1--(i) Facts. (A) A single-building housing project
received an allocation of housing credit dollar amount. The taxpayer
who owns the project elects the average income test, intending for the
10-unit building to have 100 percent low-income occupancy. The taxpayer
properly and timely designates the imputed income limitations for the
10 units as follows: 5 units at 80 percent of AMGI; and 5 units at 40
percent of AMGI. Also, for the first credit year, the taxpayer follows
proper procedure in identifying 4 units as the qualified group of units
that are to be used for qualifying under the average income set-aside
(Units ##1, 2, 6, and 7). Additionally, for the first credit year, the
taxpayer follows proper procedure in identifying all 10 units as the
qualified group of units that are to be used for the applicable
fraction determination. All of the units in the project are described
in paragraphs (b)(1)(i) through (iii) of this section.
Table 1 to Paragraph (e)(1)(i)(A)
------------------------------------------------------------------------
Imputed income limitation of the
Unit No. unit
------------------------------------------------------------------------
1................................... 80 percent of AMGI.
2................................... 80 percent of AMGI.
3................................... 80 percent of AMGI.
4................................... 80 percent of AMGI.
5................................... 80 percent of AMGI.
6................................... 40 percent of AMGI.
7................................... 40 percent of AMGI.
8................................... 40 percent of AMGI.
9................................... 40 percent of AMGI.
10.................................. 40 percent of AMGI.
------------------------------------------------------------------------
(B) In the first taxable year of the credit period (Year 1), the
project is fully leased and occupied.
(ii) Analysis. The identified groups are qualified groups under
paragraph (b)(2) of this section. All units in both of the groups are
described in paragraphs (b)(1)(i) through (iii) of this section, and
the averages of the imputed income limitations of both the 4-unit group
(Units ##1, 2, 6, and 7) and the 10-unit group do not exceed 60 percent
of AMGI.
(A) Average income set-aside. The project qualifies under the
average income set-aside because the identified group of 4 units (Units
##1, 2, 6, and 7) is a qualified group of units that
[[Page 61504]]
comprise at least 40% of the residential units in the project.
(B) Qualified basis. All 10 units in the identified qualified group
of units are used in the applicable fraction determination when
calculating qualified basis for purposes of determining the annual
credit amount under section 42(a).
(2) Example 2--(i) Facts. Assume the same facts as Example 1 of
paragraph (e)(1) of this section. In Year 2, Unit #6 (which has a
designated imputed income limitation of 40 percent of AMGI) becomes
uninhabitable. Repair work on Unit #6 is completed in Year 3. For Year
2, Taxpayer identifies the following as a qualified group of units that
are to be used for both the set-aside requirement and the applicable
fraction determination: Units ##1-4 and 7-10. For Year 3, Taxpayer
identifies all 10 units as the qualified group of units that are to be
used for the set-aside requirement and the applicable fraction
determination.
(ii) Analysis. For Year 2, the identified group is a qualified
group under paragraph (b)(2) of this section. All 8 units in the group
are described in paragraphs (b)(1)(i) through (iii) of this section,
and the average of the imputed income limitations of the 8 units in the
group of units does not exceed 60 percent of AMGI.
(A) Average income set-aside. For Year 2, the project qualifies for
the average income set-aside because the project contains a qualified
group of units that comprises at least 40% of the residential units in
the project.
(B) Qualified basis. To determine qualified basis in Year 2, the 8
units in the identified qualified group of units are used in the
applicable fraction determination when calculating qualified basis for
purposes of determining the annual credit amount under section 42(a).
Unit #6 could not have been identified in the qualified group of units
for use in the applicable fraction determination because its lack of
habitability prevents it from being a low-income unit. Further,
Taxpayer could not have identified all 9 of the habitable units to be
used in the qualified group of units for the applicable fraction
determination because the average of imputed income limitations of
those 9 exceeds 60 percent of AMGI. Taxpayer had a choice of which of
Units ##1-5 it was going to not identify for use in the applicable
fraction determination. Omitting any one of them reduces the average
limitation of the remaining group of 8 units to an amount that does not
exceed 60 percent of AMGI. Given taxpayer's decision to leave out Unit
#5, Units ##1, 2, 3, 4, 7, 8, 9, and 10 are taken into account in the
applicable fraction.
(C) Recapture. At the close of Year 2, Unit #6's unsuitability for
occupancy precludes it from being described in paragraph (b)(1)(iii) of
this section. Unit #6's resulting failure to be a low-income unit
prevents it from being in a qualified group for purposes of computing
the applicable fraction. The decline in the applicable fraction yields
a decline in qualified basis, which results in credit recapture under
section 42(j) for Year 2. Additionally, Unit #5 is not a low-income
unit because the taxpayer did not include it in the qualified group of
units identified for determining the building's applicable fraction.
The exclusion of Unit #5 from the qualified group of units further
reduces the applicable fraction for Year 2 and so reduces qualified
basis for that year as well. Thus, this exclusion increases the credit
recapture amount under section 42(j).
(D) Restoration of habitability and of qualified basis. As
described in the facts in paragraph (e)(2)(i) of this section, in Year
3, after repair work is complete, the formerly uninhabitable Unit #6 is
again occupied by a qualified tenant at the same imputed income
limitation, and the Taxpayer identifies all 10 units as the qualified
group of units that are to be used for the set-aside requirement and
the applicable fraction determination. The identified group is a
qualified group under paragraph (b)(2) of this section. All 10 units in
the group are described in paragraphs (b)(1)(i) through (iii) of this
section, and the average of the imputed income limitations of the 10
units in the group of units does not exceed 60 percent of AMGI. For
Year 3, all 10 units are included in the qualified group of units for
purposes of the average income set-aside test and are a qualified group
of units for the applicable fraction determination.
(3) Example 3--(i) Facts. Assume the same facts as Example 2 of
paragraph (e)(2) of this section, except that the income for the tenant
residing in Unit #5 has declined so that tenant's income does not
exceed 60 percent of AMGI. For Year 2, taxpayer timely redesignates
Unit #5 pursuant to the rule in paragraph (d)(1)(v) of this section so
that the imputed income limitation is 60 percent of AMGI instead of 80
percent of AMGI. Taxpayer also makes revisions so that Unit #5 is rent-
restricted under the redesignated imputed income limitation. Taxpayer
identifies 9 units (Units ##1-5 and 7-10) as the qualified group of
units that are to be used for the set-aside requirement and the
applicable fraction determination.
Table 2 to Paragraph (e)(3)(i)
------------------------------------------------------------------------
Imputed income limitation of the
Unit No. unit
------------------------------------------------------------------------
1................................... 80 percent of AMGI.
2................................... 80 percent of AMGI.
3................................... 80 percent of AMGI.
4................................... 80 percent of AMGI.
5................................... 60 percent of AMGI.
6................................... 40 percent of AMGI.
7................................... 40 percent of AMGI.
8................................... 40 percent of AMGI.
9................................... 40 percent of AMGI.
10.................................. 40 percent of AMGI.
------------------------------------------------------------------------
(ii) Analysis. For Year 2, the identified group is a qualified
group under paragraph (b)(2) of this section. All 9 units in the group
are described in paragraphs (b)(1)(i) through (iii) of this section,
and the average of the imputed income limitations of the 9 units in the
group of units does not exceed 60 percent of AMGI.
(A) Average income set-aside. For Year 2, project contains a
qualified group of units that comprises at least 40% of the residential
units in the project.
(B) Qualified basis. To determine qualified basis, all 9 units in
the identified qualified group of units are used in the applicable
fraction determination when calculating qualified basis for purposes of
determining the annual credit amount under section 42(a). Unit #6 could
not have been identified in the qualified group of units for use in the
applicable fraction determination because its lack of habitability
prevents it from being a low-income unit. Thus, Units ##1, 2, 3, 4, 5,
7, 8, 9, and 10 are taken into account in the applicable fraction
determination.
(C) Recapture. At the close of Year 2, the amount of the qualified
basis is less than the amount of the qualified basis at the close of
Year 1, because Unit #6's unsuitability for occupancy prohibits it from
being a low-income unit. Unit #6's failure to be a low-income unit
results in a credit recapture amount under section 42(j) for Year 2
related to Unit #6. Because Units ##1-5 and 7-10 are all included in
the qualified group of units for use in the applicable fraction
determination, Units ##1-5 and 7-10 are included in qualified basis for
Year 2 when determining the recapture amount.
(4) Example 4--(i) Facts. (A) A multiple-building housing project
consisting of two buildings received an allocation of housing credit
dollar amount, and the taxpayer who owns the project elects the average
income test. The taxpayer intends for the buildings (each containing 5
units) to have 100
[[Page 61505]]
percent low-income occupancy. The taxpayer properly and timely
designates the imputed income limitations for the 10 units in Buildings
1 and 2 as follows: Building A contains 2 units at 80 percent of AMGI
and 3 units at 40 percent of AMGI; and Building B contains 2 units at
40 percent of AMGI and 3 units at 80 percent of AMGI.
Table 3 to Paragraph (e)(4)(i)(A)
------------------------------------------------------------------------
Imputed income limitation of the
Building A, Unit No. unit
------------------------------------------------------------------------
A1.............................. 80 percent of AMGI.
A2.............................. 80 percent of AMGI.
A3.............................. 40 percent of AMGI.
A4.............................. 40 percent of AMGI.
A5.............................. 40 percent of AMGI.
------------------------------------------------------------------------
Building B, Unit No.
------------------------------------------------------------------------
B1.............................. 40 percent of AMGI.
B2.............................. 40 percent of AMGI.
B3.............................. 80 percent of AMGI.
B4.............................. 80 percent of AMGI.
B5.............................. 80 percent of AMGI.
------------------------------------------------------------------------
(B) In the first taxable year of the credit period (Year 1), the
project is fully leased and occupied. Also, for the first credit year,
the taxpayer follows proper procedure in identifying all 10 units as a
qualified group of units for the minimum set-aside and the applicable
fraction determination.
(ii) Analysis. For Year 1, the identified group is a qualified
group under paragraph (b)(2) of this section. All 10 units in the group
are described in paragraphs (b)(1)(i) through (iii) of this section,
and the average of the imputed income limitations of the 10 units in
the group of units does not exceed 60 percent of AMGI.
(A) Average income test. The multiple-building project meets the
average income test as the project contains a qualified group of units
that comprises at least 40% of the residential units in the project.
The fact that the average of the income limitations of the units in
Building B exceeds 60 percent of AMGI does not impact this result.
(B) Qualified basis. To determine qualified basis, all 10 units in
the identified qualified group of units across Building A and Building
B are used in the applicable fraction determination when calculating
qualified basis of each building for purposes of determining the annual
credit amount under section 42(a). The fact that the average of the
units in Building B exceeds 60 percent of AMGI does not impact the
applicable fraction of Building B because the average of the identified
group of units across both buildings does not exceed 60 percent of
AMGI.
(5) Example 5--(i) Facts. A single-building housing project
received an allocation of housing credit dollar amount, and the
taxpayer who owns the project elects the average income test. During
Year 2 of the credit period, the tenant residing in a unit with a
designated imputed income limitation of 40 percent of AMGI moves to a
market-rate unit within the same project. The tenant's income continues
to be at or below 40 percent of AMGI.
(ii) Analysis. Under the rule in paragraph (d)(1)(iv) of this
section, when the current income-qualified tenant moves to a different
unit in the project, the unit to which the tenant moves is eligible for
the taxpayer to designate as a unit with a designated imputed income
limitation of 40 percent of AMGI. If the taxpayer makes those
designations, the unit vacated by the tenant takes on the prior
limitation, if any, of the tenant's new unit. In this situation, the
vacated unit formerly occupied by the tenant is now a market-rate unit.
(6) Example 6--(i) Facts. A single-building housing project
received an allocation of housing credit dollar amount, and the
taxpayer who owns the project elects the average income test. During
Year 2 of the credit period, the disability status under the ADA of a
tenant changes, and therefore under the provisions of the ADA, the
tenant now needs to reside in a different unit with different
accommodations. The tenant currently resides in a unit with a
designated imputed income limitation of 40 percent of AMGI. A unit that
would meet the tenant's needs is available on the first-floor of the
building, but it was previously a low-income unit with a designated
imputed income limitation of 70 percent of AMGI and thus a higher
maximum gross rent than the tenant's current unit. The tenant moves to
the first-floor unit.
(ii) Analysis. The tenant's move was required under the ADA.
Accordingly, the taxpayer is permitted to change the designation of the
imputed income limitation of the first-floor unit so that the unit's
designation is 40 percent of AMGI. Under paragraph (d)(1)(iv) of this
section, the vacated unit takes on the prior limitation of 70 percent
of AMGI of the tenant's new unit.
(f) Applicability dates-(1) In general. Except as provided in
paragraph (f)(3) of this section, this section applies to taxable years
beginning after December 31, 2022.
(2) Designations of occupied units. (i) If a residential unit is
occupied at the end of the most recent taxable year ending before the
first taxable year to which this section applies and if the unit is to
be taken into account as a low-income unit under this section as of the
beginning of the first taxable year to which this section applies, then
not later than the first day of such first taxable year, the taxpayer
must designate an imputed income limitation for the unit. The first
taxable year to which this section applies means the first taxable year
beginning after December 31, 2022, if paragraph (f)(1) of this section
applies, or the taxable year described in paragraph (f)(3) of this
section if the taxpayer chooses to apply paragraph (f)(3) of this
section.
(ii) The designation required by paragraph (f)(2)(i) of this
section must comply with paragraph (c)(3)(ii) of this section and Sec.
1.42-19T(c)(3)(iv), without taking into account Sec. 1.42-19T(c)(4).
Section 1.42-19T(c)(2) applies to these designations, except that the
Agency may allow the notification to be made along with any other
notifications for the first taxable year beginning after December 31,
2022.
(iii) The designated imputed income limitation for the unit may not
be less than the income that the current occupant of the unit had when
that occupancy began.
(3) Applicability of this section to taxable years beginning before
January 1, 2023. A taxpayer may choose to apply this section to a
taxable year beginning after October 12, 2022, and before January 1,
2023, provided that the taxpayer chooses to apply Sec. 1.42-15 to the
same taxable year.
0
Par. 5. Section 1.42-19T is added to read as follows:
Sec. 1.42-19T Average income test (temporary).
(a)-(b) [Reserved]
(c) Procedures--(1) Identification of low-income units for use in
the average income set-aside test or the applicable fraction
determination--(i) In general. For a taxable year, a taxpayer must
follow the procedures described in paragraph (c)(1)(ii) of this section
to identify--
(A) A qualified group of units that satisfy the average income set-
aside test; and
(B) A qualified group of units used to determine the applicable
fraction.
(ii) Recording and communicating. The procedures described in this
paragraph (c)(1)(ii) are--
(A) Recording the identification in its books and records, where
the identification must be retained for a period not shorter than the
record retention requirement under Sec. 1.42-5(b)(2); and
(B) Communicating the annual identifications to the applicable
housing
[[Page 61506]]
credit agency (Agency) as provided in paragraph (c)(2) of this section.
(2) Notifications to the Agency with jurisdiction over a project--
(i) Agency flexibility. An Agency may establish the time and manner in
which information is annually provided to it.
(ii) Example. An Agency may allow a taxpayer to describe a current
year's information by reporting differences from the previous year's
information or by reporting that there are no such differences. Various
Agencies may choose to apply this manner of reporting to the identity
of a qualified group of units for use in the average income set-aside
or applicable fraction determination, or the imputed income limits
designated for the various units in a project.
(3) Designation of imputed income limitations. (i)-(iii) [Reserved]
(iv) Recording, retention, and annual communications related to
designations. A taxpayer designates a unit's imputed income limitation
by recording the limitation in its books and records, where it must be
retained for a period not shorter than the record retention requirement
under Sec. 1.42-5(b)(2). The preceding sentence applies both to units
whose first occupancy is as a low-income unit and to previously market-
rate units that are converted to low-income status. The designation
must also be communicated annually to the applicable Agency as provided
in paragraph (c)(2) of this section.
(4) Waiver for failure to comply with procedural requirements. On a
case-by-case basis, the Agency has the discretion to waive in writing
any failure to comply with the requirements of paragraph (c)(1) or (2)
or (c)(3)(iv) of this section up to 180 days after discovery of the
failure, whether by taxpayer or Agency. If an Agency exercises this
discretion, then the relevant requirements are treated as having been
satisfied. In such a case, the tax consequences under this section
correspond to that deemed satisfaction.
(d) Changing a unit's designated imputed income limitation. (1)
[Reserved]
(2) Process for changing a unit's designated imputed income
limitation. The taxpayer effects a change in a unit's imputed income
limitation by recording the limitation in its books and records, where
it must be retained for a period not shorter than the record retention
requirement under Sec. 1.42-5(b)(2). The new designation must also be
communicated to the applicable Agency as provided in paragraph (c)(2)
of this section and must become part of the annual report to the Agency
of income designations. The prior designation must be retained in the
books and records for the period specified in paragraph (c)(3)(iv) of
this section. A designation under this paragraph (d)(2) is considered
to be made in a manner consistent with paragraph (c)(3) of this
section.
(e) [Reserved]
(f) Applicability dates--(1) In general. Except as provided in
paragraph (f)(3) of this section, this section applies to taxable years
beginning after December 31, 2022.
(2) Designations of occupied units. (i) If a residential unit is
occupied at the end of the most recent taxable year ending before the
first taxable year to which this section applies and if the unit is to
be taken into account as a low-income unit under this section as of the
beginning of the first taxable year to which this section applies, then
not later than the first day of such first taxable year, the taxpayer
must designate an imputed income limitation for the unit. The first
taxable year to which this section applies means the first taxable year
beginning after December 31, 2022, if paragraph (f)(1) of this section
applies, or the taxable year described in paragraph (f)(3) of this
section if the taxpayer chooses to apply paragraph (f)(3) of this
section.
(ii) The designation required by paragraph (f)(2)(i) of this
section must comply with Sec. 1.42-19(c)(3)(ii) and paragraph
(c)(3)(iv) of this section, without taking into account paragraph
(c)(4) of this section. Paragraph (c)(2) of this section applies to
these designations, except that the Agency may allow the notification
to be made along with any other notifications for the first taxable
year beginning after December 31, 2022.
(iii) The designated imputed income limitation for the unit may not
be less than the income that the current occupant of the unit had when
that occupancy began.
(3) Applicability of this section to taxable years beginning before
January 1, 2023. A taxpayer may choose to apply this section to a
taxable year beginning after October 12, 2022, and before January 1,
2023, provided that the taxpayer chooses to apply Sec. 1.42-15 to the
same taxable year.
(4) Expiration date. The applicability of this section expires on
October 7, 2025.
Paul J. Mamo,
Assistant Deputy Commissioner for Services and Enforcement.
Approved: September 30, 2022.
Lily L. Batchelder,
Assistant Secretary (Tax Policy).
[FR Doc. 2022-22070 Filed 10-7-22; 11:15 am]
BILLING CODE 4830-01-P