Placed-In-Service COVID-19 Relief Deadline Approaching

For certain owners, the final relief deadline of Dec. 31, 2024, is just around the corner.

The clock is ticking for a subset of LIHTC owners who have benefited from COVID-19 relief measures. The extended deadline provided by the IRS for placing buildings in service under 2020 and 2021 LIHTC allocations is approaching. For these projects, it’s imperative for owners to meet compliance requirements to avoid the loss of housing tax credits.

When the COVID-19 pandemic caused widespread disruption in construction timelines, supply chains, and staffing, delaying many affordable housing projects, the IRS issued several notices, including Notice 2022-52, to extend critical deadlines under the LIHTC program.

One of the most significant extensions relates to the placed-in-service date, which marks the point at which a building becomes operational and eligible for LIHTC benefits. Under Notice 2022-52, projects allocated credits as far back as 2018 received additional time to meet this requirement. However, for many owners, the final relief deadline of Dec. 31, 2024, is just around the corner. We’ll take a closer look at the compliance implications of what placing a building in-service means for a LIHTC project.

COVID-19 Relief Extensions

IRS issued Notice 2022-52 in November 2022 to address a host of issues regarding the LIHTC program. At the time, disruptions and labor shortages delayed the completion of LIHTC-financed sites, making it difficult for owners to meet statutory placed-in-service deadlines. As a result, one of the relief measures was to extend the deadline for buildings to qualify for LIHTCs so that owners could address delays without forfeiting tax credit eligibility or incurring penalties. The IRS actions also helped maintain investor confidence in LIHTC projects as a stable financing option by reducing recapture risks and clarifying compliance measures.

The relief periods were not indefinite, and the final deadline is approaching. Here were the placed-in-service deadline extensions to help projects recover from pandemic-related delays:

• 2018 Allocations: Extended to Dec. 31, 2022.
• 2019 Allocations: Extended to Dec. 31, 2023.
• 2020 and 2021 Allocations: Extended to Dec. 31, 2024.

Placed-In-Service Basics

Placing a building in service is the equivalent of making a building functional within the tax credit program by providing residential housing. When you place a building in service, the building’s inner construction phase is over. Exterior items may still be under construction.

For new construction, the placed-in-service (PIS) date is the date the local buildings department issues it a Certificate of Occupancy (C of O). For projects involving the acquisition of existing buildings, the PIS date aligns with the closing date of the acquisition.

In practical terms, placed-in-service means three things:

• Leasing up units will have already begun and move-ins can start;
• Owners can begin claiming LIHTCs based on the PIS date. If all units are occupied by qualified households, the owner will be entitled to claim the credits it was allocated for the building (after the building is in service for a full calendar month).
• Your state housing agency will start monitoring your site for compliance with the tax credit law. The 15-year compliance period (during which the project must adhere to LIHTC regulations) starts with the PIS date.

Understanding the Credit Period

Owners can elect to begin claiming credits in the PIS year or the following year. This decision affects the timing of tax credit claims and compliance requirements. For example, if a building is placed in service in December 2024, the owner may begin claiming credits in 2024 or defer to 2025. The choice allows flexibility in managing occupancy timelines, but it must align with IRS Form 8609.

Be sure to know the deadline to meet your site’s minimum set-aside requirement. As a manager, meeting your site’s minimum set-aside is the most important goal. If you meet the set-aside, the owner of your site will be entitled to claim its tax credits. This rule requires a specific percentage of units in a project to be rented to qualified low-income households. If you don’t meet the set-aside, your site won’t qualify for the tax credit program, which means the owner won’t be able to claim any of the credits it was allocated. And unlike many other types of noncompliance, failure to meet the minimum set-aside isn’t correctable.

If you manage a multi-building site, the owner has the option of meeting one set-aside for the entire site or a different set-aside for each building or combination of buildings at the site. The owner must commit to its decision regarding whether to meet the minimum set-aside per site or per building(s) when filing Form 8609 (line 8b) for each building.

The PIS date helps determine the deadline for meeting the set-aside. The deadline for meeting the minimum set-aside is the last day of the first taxable year the owner claims its credits. This is either the placed-in-service year or the following year. The owner must commit to its decision regarding the deadline for meeting the set-aside when filing Form 8609 (line 10a) for your buildings. Once made, the owner’s choice is irrevocable.

Although owners should decide this issue during the development phase, they don’t have to commit to their decisions until after their building is placed in service and all units are occupied by qualified households, and they complete IRS Form 8609 (line 10a). Should unexpected circumstances arise before an owner completes this form, it can change its decision.

Credit Period vs. Compliance Period

It’s worth mentioning that the “credit period” differs from a site’s “compliance period.” The credit period is the 10-year period during which the owner claims its tax credits. As discussed, it began either the same taxable year the building was placed in service or the following year.

The compliance period is the 15-year period during which you must follow the tax credit law to keep your site in compliance. It starts the same year the credit period does, but lasts five years longer. This is because you must maintain compliance for 15 years, even though the owner claims its 15 years’ worth of tax credits over just 10 years.

Because the tax credit period and the compliance period begin at the same time and affect when the owner can claim credits, managers may think that the two are identical. If you make this mistake, you may believe that your compliance obligations end once the owner stops claiming credits. But this isn’t so. You must maintain compliance for an additional five years after the owner stops claiming credits, that is, after the credit period ends. If you don’t, the IRS may take back the credits the owner already claimed but doesn’t deserve.

Partial Completion Strategy to Meet Impending Deadline

If you have an impending PIS deadline as a result of COVID relief and you’re having trouble making the entire building ready for occupancy, you may try to concentrate all your efforts on being able to certify just one unit in the building as suitable for occupancy. In IRS Notice 88-186, “the placed-in-service date for a new or existing building used as residential rental property is the date on which the building is ‘ready and available’ for its specifically assigned function, i.e., the date on which the first unit in the building is certified as being suitable for occupancy in accordance with state or local law.”

For a LIHTC developer approaching a placed-in-service deadline, this definition extends a strategic advantage. If one unit in the building is certified to be ready for occupancy before the deadline, then the entire building will be considered as having been placed in service. That is to say, even while the remaining portion of the building may be under construction or in the final stages of preparation, satisfying the occupancy certification of one unit will meet the IRS requirement in that respect.

In this regard, developers can ensure that the placed-in-service deadline is met and their allocated tax credits are preserved and protected by concentrating efforts on completing at least one unit and getting that unit certified. This will enable them to continue the construction or rehabilitation of remaining units without compromising the eligibility of the entire project for tax credits.