On Friday, March 23, 2018, the President signed a $1.3 trillion Omnibus Spending bill that had been passed by Congress. Two (2) provisions of the bill are important to those involved in the Low-Income Housing Tax Credit program.
1. State Housing Credit Ceiling
This bill provides a 12.5% increase in the amount of credits that can be allocated by each state for 2018, 2019, 2020 and 2021. In each of those calendar years, the dollar amounts in effect for determining the current-year ceiling (after any increase due to the applicable cost of living adjustment) are increased by multiplying the dollar amounts for that year by 1.125.
2. Average Income Test for Qualified Low-Income Housing Project
This provision adds a third optional test to the 20-50 and 40-60 tests for a qualified low-income housing project. A project meets the minimum requirements of the average income test if 40 percent or more (25 percent or more in the case of a project located in a high cost housing area) of the residential units in such project are both rent-restricted and occupied by individuals whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit.
The taxpayer designates the imputed income limitation for each unit. The imputed income limitation is determined in 10-percentage-point increments, and may be designated as 20, 30, 40, 50, 60, 70, or 80 percent. The average of the imputed income limitations for all the units designated must not exceed 60 percent of area median gross income.
For purposes of the rental of the next available unit in a project with respect to which the taxpayer elects the average income test, if the income of the occupants of the unit increases above 140 percent of the greater of (i) 60 percent of area median gross income, or (ii) the imputed income limitation designated by the taxpayer with respect to the unit, then the unit ceases to be treated as a low-income unit if any residential rental unit in the building (of a size comparable to, or smaller than, such unit) is occupied by a new resident whose income exceeds the applicable imputed income limitation. In the case of a deep rent skewed project, 170 percent applies instead of 140 percent, and other special rules apply.
The provision relating to the State housing credit ceiling is effective for calendar years beginning after December 31, 2017, and before January 1, 2022.
The provision relating to the Average Income Test is effective for elections made after March 23, 2018, the date of the bill’s enactment. Generally, taxpayers make their election in the year a qualified low-income building is placed in service, at the time the Form 8609 is executed. Once the election is made, the election is irrevocable. The expectation is that Part II, Section 10(c) will be modified to include the averaging option and that it will apply equally to 9% and 4% transactions. The Average Income Test can benefit projects that have not yet executed Form 8609 because a building has not yet been placed in service. In Massachusetts, it remains to be seen how the change in the law will affect the current practice of signing and recording the tax credit regulatory agreement at the time of construction loan closing, rather than upon completion.