IRS Clarifies Income Limits for Average-Income Set-Aside Option

Every tax credit site must meet and maintain a minimum set-aside throughout a 15-year compliance period to qualify for the tax credit program. A minimum set-aside is the federally required minimum level of tax credit units at a site. To meet the set-aside, you must rent a certain percentage of the units in your building or site to qualified low-income households.

In 2018, the Consolidated Appropriations Act created a new option for the minimum set-aside election. Previously, tax credit units were restricted to households earning no more than 60 percent of the area median income (AMI). The prior minimum set-asides called for having 20 percent of the units targeted to households earning no more than 50 percent of the AMI or 40 percent of the units at no more than 60 percent of the AMI. These options remain part of the federal program.

Now, there’s an income-averaging minimum set-aside option that allows LIHTC-qualified units to serve households earning as much as 80 percent of the AMI as long as the average income limit at the property is no more than 60 percent of the AMI. A site using the income-averaging option must make at least 40 percent of its units affordable to eligible households. Under income averaging, unit designations may be set at only 10 percent increments beginning at 20 percent of the AMI. Thus, the allowable income/rent designation levels are 20 percent, 30 percent, 40 percent, 50 percent, 60 percent, 70 percent, and 80 percent of AMI.

The income-averaging option is intended to expand the program to serve more families. Before, families earning 80 percent of the AMI didn’t qualify for an LIHTC unit and were likely to be living in market-rate housing. Also, income averaging could help a site’s bottom line and allow for deeper income targeting. Higher rents that households at the upper range could pay would have the potential to offset the lower rents for extremely low- and very low-income households.

Limits for the 20, 30, 40, 70, and 80 Percent Designations

The IRS recently issued guidance on how to determine the income limits for the income-averaging test. Revenue Ruling 2020-4 states that HUD’s calculation for the very low-income limits should be used as the basis to determine the full range of income limits under the average-income set-aside.

Every year, HUD publishes two sets of limits—Section 8, for HUD’s assisted housing programs, and the Multifamily Tax Subsidy Projects (MTSP) income limits for LIHTC qualification levels and maximum housing expenses.

The MTSP starts with HUD’s Section 8 “very low income” (VLI) figure of 50 percent AMI and sets the 60 percent limits as households with incomes at 120 percent of VLI.

The recently issued Revenue Ruling 2020-04 says, “Congress did not indicate that a different HUD income level calculation category should be used,” so the IRS simply expands the current practice:

• 20 percent AMI is 40 percent of VLI
• 30 percent AMI is 60 percent of VLI
• 40 percent AMI is 80 percent of VLI
• 70 percent AMI is 140 percent of VLI
• 80 percent AMI is 160 percent of VLI

Protections for Existing Allocated Sites

Due to the two-year gap from when the income-averaging minimum set-aside option was available to when the IRS clarification came out, some LIHTC developers that chose the income-averaging minimum set-aside option may have used the incorrect income limits. The recent guidance gives protection for these buildings that have been placed-in-service before the guidance came out.

In situations where a site may have used non-MSTP income limits such as the “low income” and “extremely low income” limits that apply to the Housing Trust Fund appropriations program, the revenue ruling allows these units to continue to count as qualified if certain conditions are met.

Specifically, the developer must have “unambiguously indicated that the taxpayer intended to elect the average-income set-aside,” and had a reasonable expectation for “a specific dollar amount” greater than the “designated imputed income limitation” determined under the ruling. Meeting this criteria means that for the remainder of the compliance period, the dollar amount for the income limits under this ruling for that unit won’t be less than the reasonable amount.