Taxpayers claiming the low-income housing credit should apply the “average income” minimum set aside test by reference to the “very low-income” limits calculated by the U.S. Department of Housing and Urban Development (HUD) for purposes of determining eligibility under the HUD Section 8 program. HUD determinations for very low-income housing families are currently used to calculate the low-income housing credit income limits under the alternate “20-50” and “40-60” minimum set-aside tests.
Rev. Rul. 89-24, 1994-2 C.B. 5, as modified and superseded in part by Rev. Rul. 94-57, 1994-2 C.B. 5, is amplified.
Average Income Test
A taxpayer claiming the low-income housing credit under Code Sec. 42 must elect to satisfy one of three minimum-set aside tests:
- the “20-50” test, under which 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);
- the “40-60” test, under which 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; or
- the “average income” test under Code Sec. 42(g)(1)(C), which was added by the Consolidated Appropriations Act of 2018 ( P.L. 115-141).
The average income test is satisfied if 40 percent or more of the residential units in the project (25 percent or more in the case of a project located in a high cost housing area) 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. The imputed income limitation for any unit must be 20, 30, 40, 50, 60, 70 or 80 percent of AMGI. The average of the designated imputed income limitations may not exceed 60 percent of AMGI.
Application of HUD Calculation
HUD uses three different principal income level calculation categories:
- “low-income,” which is limited at 80 percent of AMGI;
- “very low-income,” which is limited at 50 percent of AMGI; and
- “extremely low-income,” which is limited at the higher of 30 percent of AMGI or the “Federal Poverty Level.”
Under the IRS guidance, HUD’s “very low-income” calculation, as adjusted for family size and consistent with the methods provided in Rev. Rul. 89-24, is used as the basis for determining the full range of percentage-based income limits under the new average-income set-aside test.
Specifically, the income attributable to a family in a unit may not exceed an applicable percentage of the HUD income limit for a very low income family of the same size in accordance with the following schedule for the percentage-based imputed income limit chosen for the unit within the 20 through 80 percent range:
- 20 percent limit: 40 percent or less of the income limit for a very low-income family of the same size;
- 30 percent limit: 60 percent or less of the income limit for a very low-income family of the same size;
- 40 percent limit: 80 percent or less of the income limit for a very low-income family of the same size;
- 50 percent limit: 100 percent or less of the income limit for a very low-income family of the same size;
- 60 percent limit: 120 percent or less of the income limit for a very low-income family of the same size;
- 70 percent limit: 140 percent or less of the income limit for a very low-income family of the same size;
- 80 percent limit: 160 percent or less of the income limit for a very low-income family of the same size.
A list of income limits released by HUD may be relied upon until 45 days after HUD releases a new list of income limits, or HUD’s effective date for the list expires.
Prospective Application
Special relief is provided to a taxpayer who receives a low-income housing credit allocation prior to February 18, 2020. The taxpayer must have unambiguously indicated in its application that it will elect the average-income set aside test, and also specified a dollar amount as an expected designated imputed income limitation for a unit that is higher than allowed by the new guidance. If the dollar amount is reasonable it may be relied upon for the entire compliance period of the building, and is also used to determine whether the tenant initially meets the income limitation for the unit.
