Decoding the Essentials of Low-Income Housing Tax Credit Compliance

Understanding LIHTC Compliance: A Comprehensive Guide

The Importance of the Minimum Set-Aside

The Low-Income Housing Tax Credit (LIHTC) program mandates that a certain percentage of units in a project must be set aside for low-income tenants. This requirement, known as the minimum set-aside, is crucial for a project to qualify for LIHTC benefits. There are three main options for the minimum set-aside:

• **20% of units at 50% of Area Median Income (AMI) (20-50) **
• 40% of units at 60% of AMI (40-60)
• The average income test, where the average income of all low-income units does not exceed 60% of AMI, with individual units designated between 20% and 80% of AMI.

The Applicable Fraction & Qualified Basis

The applicable fraction is a calculation that determines the portion of a building's units that qualify as low-income. This figure directly impacts the project's qualified basis, which is used to calculate the LIHTC benefits. The applicable fraction considers both the unit fraction (the ratio of low-income units to total units) and the floor space fraction (the ratio of low-income unit square footage to total residential square footage), with the lesser of the two being used.

Extended Use Period

Beyond the initial 15-year compliance period, LIHTC projects must adhere to an extended use period, typically an additional 15 years, making the total affordability commitment 30 years. This period ensures that the project remains affordable to low-income tenants beyond the time frame in which tax credits are claimed.

The Impact of Non-Compliance

Failing to meet the minimum set-aside or maintain the applicable fraction can lead to severe consequences, including the recapture or disallowance of tax credits. Recapture involves returning previously claimed tax credits to the IRS, while disallowance prevents claiming future credits. It's crucial for property managers and owners to understand these rules to avoid jeopardizing the project's financial benefits.

Multi-Building Projects and Compliance

For projects with multiple buildings, owners can choose to treat them as separate projects or group them together for the purpose of meeting the minimum set-aside requirement. This flexibility allows for strategic planning to ensure compliance across the entire development.

Conclusion

LIHTC compliance involves navigating complex rules and regulations, but understanding the key components—such as the minimum set-aside, applicable fraction, and extended use period—can help owners and managers ensure their projects remain in good standing. By adhering to these requirements, LIHTC projects can continue to provide affordable housing to those in need while benefiting from valuable tax incentives.

For more detailed insights and examples on LIHTC compliance, watch the full workshop here.