This is the third in my series of articles on the new Average Income Regulation. In this article, I will review the requirements relating to the designation of units.
Designation of Imputed Income Limitations and Identification of Units
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. The regulations also revise the 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. (Owners and managers should note that this may be before or after the beginning of the first year of the credit period). The designation must also be communicated annually to the HFA, and the HFA may establish the time and manner in which information is provided to it. This change will allow a taxpayer to make designations after having a chance to evaluate the market for a particular unit.
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. 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.
Timing of Designations of Income Limitations
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.
Changing a Unit’s Imputed Income Designation
The proposed regulations did not allow income limitations to be changed after they had been designated.
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 future written instructions from the IRS.
(2) In accordance with an HFAs 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 comply with the requirements of the Americans With Disabilities Act of 1990; the Fair Housing Amendments Act of 1988; the Violence Against Women Act; the Rehabilitation Act of 1973; 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 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.
Any new designation of units must be reported to the HFA in a manner required by the HFA. For example, an HFA may allow the project owner to describe a current year’s information by reporting differences from the prior year’s information or by reporting that there is no difference from the prior year.
As noted above, on a case-by-case basis, the Agency has the discretion to waive in writing any failure to comply with the reporting requirements up to 180 days after discovery of the failure, whether by the owner or Agency. If an Agency exercises this discretion, the reporting requirements will be considered to have been met.