Low Income Housing Tax Credit Program
Introduction
The Low Income Housing Tax Credit (LIHTC) Program is a federal initiative designed to encourage the development of affordable rental housing for low-income households. Administered by the Internal Revenue Service (IRS) in collaboration with state housing finance agencies (HFAs), the program provides tax credits to developers and investors in exchange for creating and maintaining affordable housing units. The Compliance Manual serves as a comprehensive guide for property owners, managers, and stakeholders to ensure adherence to program rules and regulations. It outlines the requirements for eligibility, tenant income verification, rent restrictions, and ongoing compliance monitoring.
1. Program Overview
The Low Income Housing Tax Credit (LIHTC) program was established under the Tax Reform Act of 1986 and has since become the primary federal tool for financing affordable housing. The program allocates tax credits to state HFAs, which then award them to developers through a competitive process. Developers use these credits to offset federal tax liabilities, making it financially viable to build or rehabilitate affordable housing. In return, they must comply with strict program rules for a specified compliance period, typically 30 years.
The manual emphasizes that compliance is not optional—it is a legal obligation tied to the receipt of tax credits. Failure to comply can result in recapture of credits, financial penalties, or disqualification from the program.
2. Key Compliance Requirements
The manual outlines several critical areas of compliance that property owners and managers must adhere to:
- Eligibility of Tenants: Units must be rented to households whose income does not exceed a specified percentage of the area median income (AMI). The manual provides detailed guidance on calculating household income, including which sources of income are included or excluded.
- Rent Restrictions: Rents for LIHTC units cannot exceed a predetermined limit, typically set at 30% of the imputed income limitation for the unit. The manual explains how to calculate rent limits and adjust them for utility allowances.
- Unit Designation: Properties must maintain a specific percentage of units as LIHTC-compliant. These units must be clearly designated and cannot be switched to market-rate units without prior approval.
- Initial Lease-Up Period: During the first year of occupancy, properties must meet minimum occupancy requirements for LIHTC units. The manual provides timelines and procedures for achieving this.
- Ongoing Monitoring: Properties are subject to regular inspections and audits by state HFAs to ensure continued compliance. The manual outlines the types of documentation that must be maintained, such as tenant income certifications, rent rolls, and utility allowance schedules.
3. Tenant Income Certification
One of the most critical aspects of Low Income Housing Tax Credit (LIHTC) compliance is verifying tenant eligibility. The manual provides step-by-step instructions for conducting income certifications, including:
- Defining Household Income: The manual explains how to calculate gross and adjusted income, taking into account wages, Social Security benefits, child support, and other sources. It also lists exclusions, such as temporary income or certain educational scholarships.
- Documentation Requirements: Property owners must obtain and retain documentation to verify income, such as pay stubs, tax returns, and third-party verification forms. The manual emphasizes the importance of accurate record-keeping and provides templates for required forms.
- Recertification: Tenants must be recertified annually to ensure they continue to meet income eligibility requirements. The manual outlines the recertification process and timelines.
4. Rent and Utility Allowances
To ensure affordability, Low Income Housing Tax Credit (LIHTC) properties must adhere to strict rent limits. The manual explains how to calculate these limits based on the unit size and the applicable AMI percentage. Key points include:
- Gross Rent vs. Net Rent: Gross rent includes both the tenant’s rent payment and any utility allowances. The manual provides guidance on calculating utility allowances and adjusting rents accordingly.
- Rent Increases: Any rent increases must comply with program limits and be approved by the HFA. The manual outlines the process for requesting and implementing rent adjustments.
5. Non-Compliance and Corrective Actions
The manual stresses the importance of proactive compliance to avoid penalties. However, it also provides guidance on addressing non-compliance issues when they arise:
- Common Compliance Errors: Examples include failing to properly verify tenant income, charging rents above the allowable limit, or failing to maintain required documentation.
- Corrective Actions: If non-compliance is identified, property owners must take immediate steps to rectify the issue. The manual outlines corrective actions, such as refunding overcharged rents or evicting ineligible tenants.
- Penalties: Serious or repeated violations can result in recapture of tax credits, financial penalties, or removal from the program. The manual explains the appeals process and how to mitigate penalties.
6. Record-Keeping and Reporting
Accurate and thorough record-keeping is essential for Low Income Housing Tax Credit (LIHTC) compliance. The manual specifies the types of records that must be maintained, including:
- Tenant Files: These must include income certifications, lease agreements, and supporting documentation.
- Property Records: These include rent rolls, utility allowance schedules, and inspection reports.
- Reporting Requirements: Property owners must submit annual reports to the HFA, detailing occupancy, tenant income, and rent levels. The manual provides templates and deadlines for these reports.
7. Monitoring and Inspections
State HFAs are responsible for monitoring Low Income Housing Tax Credit (LIHTC) properties to ensure ongoing compliance. The manual explains the monitoring process, including:
- Desk Reviews: HFAs review annual reports and other documentation submitted by property owners.
- On-Site Inspections: Properties are subject to periodic physical inspections to verify compliance with habitability standards and program requirements.
- Findings and Resolutions: If issues are identified during monitoring, the HFA will issue a findings report. Property owners must respond with a corrective action plan.
8. Special Considerations
The manual also addresses unique situations that may arise in Low Income Housing Tax Credit (LIHTC) properties, such as:
- Mixed-Income Properties: Properties with both LIHTC and market-rate units must ensure that LIHTC units are clearly designated and comply with program rules.
- Tenant Turnover: When a tenant moves out, the unit must be re-rented to an eligible household within a specified timeframe.
- Extended Use Agreements: Many LIHTC properties are subject to extended use agreements that require affordability beyond the initial compliance period. The manual explains how to comply with these agreements.
9. Best Practices for Compliance
To help property owners and managers maintain compliance, the manual offers several best practices, including:
- Training Staff: Ensure that all staff members are trained on LIHTC rules and procedures.
- Regular Audits: Conduct internal audits to identify and address potential compliance issues before they are flagged by the HFA.
- Staying Informed: Keep up-to-date with changes in LIHTC regulations and guidance from the IRS and HFA.
10. Conclusion
The Low Income Housing Tax Credit (LIHTC) Compliance Manual is an essential resource for anyone involved in the development, management, or oversight of affordable housing financed through the Low Income Housing Tax Credit (LIHTC) program. By following the guidelines outlined in the manual, property owners and managers can ensure compliance with program requirements, maintain the affordability of their units, and avoid costly penalties. Ultimately, the manual serves as a roadmap for fulfilling the program’s mission of providing safe, decent, and affordable housing to low-income households.