NCSHA Letter to the IRS Regarding Average Income Minimum Set-Aside

On June 13, 2018, the National Council of State Housing Agencies (NCSHA) sent a letter to the Internal Revenue Service (IRS) outlining issues that Housing Finance Agencies (HFAs) will face with regard to the new Average Income Minimum Set-Aside and providing implementation recommendations for IRS consideration. Major elements of the NCSHA letter include the following:


  1. While it is expected that most HFAs will include income averaging as part of their programs, NCSHA does not believe that there is a legal obligation to do so. In other words, states have the ability to prohibit use of the Average Income Minimum Set-Aside. I agree with this if such prohibition is part of the HFA’s Qualified Allocation Plan (QAP).
  2. NCSHA believes that HFAs will have considerable latitude in the design of income averaging policies, such as:
    1. Restricting income averaging in developments with market-rate units;
    2. Establishing a process for designating units at various income levels and whether or not to permit “floating” units;
    3. Institute procedures that would allow owners to change unit designations over time, so long as the 60% average is maintained;
    4. Determine how many income designation levels any individual project may have – i.e., HFAs are not required to permit a project to use all seven of the permitted unit designations under the Average Income Set-Aside;
    5. Require owners of multiple building developments that elect income averaging to do so for all buildings in the development rather than making different elections for different buildings;
    6. Require income recertifications for 100% low-income developments if the agency deems it necessary; and
    7. Limit or prohibit income averaging for resyndication deals;
    8. Require unit parity in regard to bedroom size by income designation to prevent owners from designating larger units at higher income designations and smaller units at lower income designations.


I agree that HFAs may implement virtually all the policies outlined as long as the policies are part of the QAP and owners are aware of the policies when applying for credits.


NCSHA also provided a number of examples of when projects would be considered in or out of compliance. An important takeaway from the examples is that the NCSHA position is that once a unit is designated under a certain income limit, failure to rent that unit at the designated limit will constitute a reportable 8823 violation. The following example makes the point:


A ten-unit development has four units designated at 20% of AMI and six-units designated at 80% of AMI, for an average of 56%. One of the 20% units is rented to a household who, at the time of initial occupancy, has a gross annual household income of 25% of AMI. The income average of the remaining nine units is 60% (three units at 20% of AMI and six units at 80% of AMI). The project does not fail the income average minimum set-aside, but the unit is not in compliance with its designated restriction. This unit is out of compliance on the date of initial occupancy, and the agency will report it as an over-income unit by checking line 11a of Form 8823.


NCSHA does provide one example of non-compliance that demonstrates the importance of understanding the importance of meeting the required unit designation and not just staying below the 60% level for the units. In the example cited above, assume two of the 20% units have been rented to households with income above the designated (i.e. 20%) level. Even if the new households have incomes below the 60% level, because they do not meet the required income designation, they are redesignated as non-low-income units, leaving only eight low income units – two at 20% and six at 80%. These low-income units now average 65% and the project loses all credit (it has failed the minimum set-aside test).


NCSHA has requested that the IRS take steps to facilitate income averaging, including:


  • Establish a procedure for HUD to use in calculating area-specific income limits at the various designations allowable under income averaging. Until that happens, it is assumed that HFAs and owners will determine income limits using the 50% income limit for the applicable area as a base and applying a multiplier to determine the other income limit designations.
  • Update Form 8823 to reference Average Income for Line 11f.
  • Establish rules for determining next available unit designation in cases when more than one household in units of different designated income levels go over income at the same time. Until such guidance is provided, NCSHA is recommending as a best practice that HFAs require owners to make a reasonable effort to designate the next available unit (if that unit is a market unit) at the lower/lowest income designation of the units with over-income tenants.


This letter highlights concerns of NCSHA relative to the Average Income Minimum Set-aside and seeks guidance from the IRS. Until such guidance is provided, owners and managers should rely on direction from the applicable HFA when implementing the Average Income Set-Aside. HFAs have significant discretion relative to administration of the LIHTC program and until the IRS provides clear guidance in these areas, I recommend that HFA directions be followed.