LIHTC Q&A: The more things change… the more questions we have
Tax season is upon us, and this is the time I field many questions from clients and colleagues. The job never gets boring, and there are always new issues or situations to analyze. Here is a sample of recent top questions.
IRS Notice 2021-12 allows for a change in the calculation of the qualified basis of a building for tax years ending between April 1, 2020, and June 30, 2021. How does this impact the Low-Income Housing Tax Credit (LIHTC) to be claimed on the calendar year-end 2020 tax returns?
This new provision means that an owner can start the LIHTC on a building not fully rented up to its target LIHTC percentage. Usually an owner wants to fully rent up a building to avoid a two-thirds credit on units not rented at year-end. This Notice extends several LIHTC and tax-exempt bond deadlines and specifically allows the owner to use the qualified occupancy at June 30, 2021, to determine the qualified basis. To start the LIHTC, the building (or group of buildings in a multiple-building project) still needs to have met minimum set-aside with real occupancy by Dec. 31, 2020. The Notice does not appear to change the 2020 credit calculation; it just allows additional time to fully rent the building. We don’t know if there is an impact on 2021 calculation, which usually is based on the occupancy at Dec. 31, 2021. A full year of credit in 2021 is a real possibility.
The new tax law at the end of 2020 provided a change in the Alternative Depreciation System (ADS) life for residential rental property that made the Real Property Trade or Business (RPTOB) election. How is this change going to impact 2020 tax returns?
The short answer is that we need IRS guidance on this one, and we don’t know when it may come. Properties that made an RPTOB election and have real property placed in service prior to 2018 will use a 30-year ADS life rather than 40 years (other than buildings that elected to use the 40-year ADS life prior to 2018). This could be a change in accounting method, which would require filing Form 3115 with the IRS and allow for a catch-up of 2018 and 2019 depreciation. Alternatively, it may be considered a change in use, which is what happened in the year the RPTOB election was made in 2018 or 2019. The IRS may devise an approach that is different from either one of these options. For now we are preparing draft tax returns using a variety of reasonable approaches and waiting impatiently for IRS guidance so returns can be finalized.
What is the latest information on implementing the new fixed 4% LIHTC rate on tax-exempt bond-financed projects?
This is another area where we are going to need clarification from the IRS. New deals that are just getting started in 2021 are going forward with the fixed 4% rate. As expected, the additional equity is making more deals viable, and some can reduce soft debt, making it available for other deals. The applicability of the fixed 4% rate for buildings that started construction prior to 2021 and will be placed in service after 2020 depends on the situation. If tax-exempt bonds used for the construction or rehabilitation are “issued” after 2020, there is a case to use the fixed 4% rate. Some deals have additional bonds being issued to help them meet the 50% test. Others are financed with tax-exempt bonds that are drawn as needed or as permanent financing only. The IRS will have to clarify what “issued” means in these situations. State tax credit agencies and equity investors are likely to wait for IRS guidance before proceeding with using the 4% rate for the deals in the gray areas.
What is the latest news on the Average Income Set-Aside proposed regulations?
The IRS issued proposed regulations last fall, and there were some provisions that made the set-aside challenging to use. The comment period on the proposed regulations ended Dec. 29, 2020, and many industry associations, owners, and investors provided comments. The IRS will hold a public hearing on Wednesday, March 24, at noon ET, and industry participants are getting organized so that the IRS hears the full range of industry concerns and suggestions. There is no IRS timeline for revising or finalizing the proposed regulations. While we wait, owners and investors are analyzing the impact of the proposed regulations on their deal underwriting and transaction structure.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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