How to Determine Applicants' Eligibility for Section 8/Tax Credit Site
Many Section 8 sites need to be refinanced, and their owners often include the low-income housing tax credit (LIHTC) program as part of the sites' new financial structure. But once an owner receives an allocation of tax credits for a Section 8 site, the site manager must approve only those applicants who qualify for both the HUD-regulated Section 8 program and the IRS-regulated LIHTC program.
It's important to follow the rules that both HUD and the IRS require; if you don't, you could lose money. If HUD or your contract administrator discovers that you have rented a Section 8 unit to an applicant who isn't eligible for the program, you may be required to pay HUD some subsidy back.
And if you rent a tax credit unit to an applicant who isn't eligible for the LIHTC program, you could lose the tax credit for the unit, and the investors in your property may invest less money in the site. If you work for a third-party property management company and you rent a tax credit unit to an ineligible applicant, and it's your fault, you may be required to give money to the developer to compensate him for the lost tax credit.
Follow 13 Rules to Determine Applicants' Eligibility
With the help of affordable housing consultant Liz Bramlet, we'll tell you how to follow 13 rules for determining whether an applicant is eligible for your Section 8/tax credit site.
Rule #1: Check effective date of site's original HAP contract. For a site with project-based Section 8, the income limit the owner uses to determine an applicant's eligibility to receive rental assistance depends on the effective date of the original housing assistance payment (HAP) contract signed for the site:
Effective date before Oct. 1, 1981: An applicant must have an income not exceeding the low-income limit to qualify to receive rental assistance through the Section 8 program. HUD sets the low-income limit at 80 percent of the area median income (AMI).
Effective date on or after Oct. 1, 1981: An applicant must have an income that is not more than the very low-income limit to qualify to receive rental subsidy through the Section 8 program. HUD sets the very low-income limit at 50 percent of the AMI.
Rule #2: Know how many units receive Section 8. At some sites, all the residents receive rental assistance; at other sites, the rental subsidy contract provides subsidy for only some of the residents. To manage a site correctly, you must know the percentage of the residents at your site for whom your subsidy contract provides assistance.
Rule #3: Check whether your rental assistance floats. When a rental assistance contract covers only a portion of the units, it's important to know whether the contract allows the subsidy to “float”—that is, to be effective at different units at the site.
If the contract allows the rental assistance to float, a resident may continue to receive subsidy after moving to another unit. If the contract does not allow the rental assistance to float, a resident may continue to receive subsidy only if he transfers to another unit covered by the subsidy contract.
Rule #4: Know minimum set-aside for your LIHTC site. When an owner receives an allocation of low-income housing tax credits, he commits to a minimum set-aside with the state housing agency that allocated the tax credits. An owner may commit to one of the following minimum set-asides:
20% @50%. The owner commits to renting at least 20 percent of the units at the property to applicants with income not exceeding 50 percent of the AMI.
40% @60%. The owner commits to renting at least 40 percent of the units at the property to applicants with income not exceeding 60 percent of the AMI.
25% @60%. In New York City, an owner may commit to renting at least 25 percent of the units at a property to applicants with income not exceeding 60 percent of the AMI.
Deep Rent Skew. An owner elects one of the above minimum set-asides and commits to renting at least 15 percent of the tax credit units at the property to applicants with income not exceeding 40 percent of the AMI.
PRACTICAL POINTER: Make sure you know how the Housing and Economic Recovery Act of 2008 (HERA) allows an owner to hold a project's tax credit income limits harmless even when the area's Section 8 income limits go down. See “Staying on Top of HERA: A Review of Key Provisions Impacting Compliance,” in the Insider's sister publication, Tax Credit Housing Management Insider (Special Issue, May 2009), available at www.taxcredithousinginsider.com.
Rule #5: Know if owner committed to additional set-asides. There's intense competition among owners to receive an allocation of low-income housing tax credits. As a result, state housing agencies are able to get owners to make additional promises about how they will operate their properties in exchange for an allocation of tax credits.
At many sites, for example, an owner may commit to the state housing agency that he will use an income limit lower than required by the property's minimum set-aside to approve applicants for some of his tax credit units. He may, for instance, commit to the 40% @ 60% minimum set-aside but also agree to rent some of his units to applicants qualifying with an income not exceeding 30 percent of the AMI.
Rule #6: Identify which site buildings are part of tax credit project. The owner of an LIHTC site must implement its minimum set-aside as a project rule. That is, the owner must rent the number of units required by the minimum set-aside he elects for the project in order for each building on that project to be able to generate a tax credit. But how does an owner or manager know what buildings the IRS considers to be part of the same project?
At the end of the credit allocation process, the state housing agency issues an IRS Form 8609 for each building in a tax credit project. The state agency completes Part 1 of the form, and the owner must complete Part 2 prior to claiming the first year's tax credit for the building. On line 8b, the owner indicates whether the building represented by the form is part of a multi-building project.
If the owner answers that the building is part of a multi-building project, he must provide a list of the other buildings he's including as part of the same project. He must meet the site's minimum set-aside using the units in the buildings he lists as part of the same project.
Rule #7: Know credit allocation for each building. Generally, a state housing agency allocates tax credits by building. Since each building receives its own credit allocation, the owner and manager must know how many units in each building can generate a tax credit. The number of units in each building that can generate a tax credit, if occupied by an eligible resident, is determined by the size of its credit allocation.
Example: Ms. Smith owns a 100-unit building, and she received a credit allocation covering 70 percent of the building. Seventy of the units in the building may produce a tax credit if the units are occupied by residents Ms. Smith has certified as eligible for the LIHTC program.
Example: Mr. Goldstein owns a 50-unit building, and he received a credit allocation covering 100 percent of the building. All 50 units in the building may produce a tax credit if the units are occupied by residents Mr. Goldstein has certified as eligible for the LIHTC program.
PRACTICAL POINTER: Remember that even though a building may have its own credit allocation, it must be part of a project that's in compliance with its minimum set-aside to produce a tax credit.
Rule #8: Meet each building's targeted applicable fraction. A building's applicable fraction is the portion of the building occupied by LIHTC-qualified residents. It is that portion of a building qualified to produce a tax credit. An owner's goal for the applicable fraction for an LIHTC building is that portion of the building covered by its credit allocation.
For example, if an owner received a credit allocation covering 70 percent of a building, he would want 70 percent of the building occupied by LIHTC-qualified residents. But if that same owner received a credit allocation covering 100 percent of a building, he would want 100 percent of the building occupied by LIHTC-qualified residents.
An owner calculates a building's applicable fraction as the lesser of the percentage of units or the percentage of floor space occupied by LIHTC-qualified residents.
Example: Ms. Moranto operates a building with 100 units and 74,000 square feet. She received a credit allocation covering 60 percent of the building. For the building to produce the tax credit Ms. Moranto anticipates, 60 units (100 units x 60%) taking up at least 44,400 square feet (74,000 sq. ft. x 60%) must be occupied by LIHTC-qualified residents.
For a building to produce the tax credit the owner anticipates, the owner must meet her targeted applicable fraction by the end of the first year of the building's credit period. In the above example, for Ms. Moranto to receive the tax credit she wants from her building, both the unit applicable fraction and the floor space applicable fraction must be at least 60 percent by the end of the first year of the building's credit period.
EDITOR'S NOTE: In most mixed-income LIHTC buildings, the tax credit units float. But when an owner elects to deep rent skew, the tax credit units are fixed.
Rule #9: Learn the Section 8 student rule. For a Section 8 unit, HUD requires that an owner consider the annual income of a student's parents to determine the eligibility of any student who's not yet 24 years old and is enrolled at an institution of higher education on a full-time or part-time basis, unless the student is:
A veteran; or
Has at least one child.
The student's parents, either individually or jointly, must be found to be income eligible, using the low-income limit, for the student to be eligible to receive Section 8 assistance. A student under 24 years old may be eligible, without considering his parents' income, if he can demonstrate that he is independent of his parents by showing that he:
Is of legal contract age;
Has established a separate residence for at least one year;
Is not claimed as a dependent by a parent or legal guardian; and
Provides a certification from his guardian or parents of the amount of their financial support, even if the amount provided is zero.
The Section 8 student rule does not apply to a student who:
Is an orphan or ward of the court;
Lives with his parents or guardian; or
Is disabled and was living in a HUD-assisted unit on Nov. 30, 2005.
A student who falls into one of these three categories may qualify to receive Section 8 assistance without qualifying under the Section 8 student rule.
Rule #10: Learn the LIHTC student rule. Most households comprised entirely of full-time students are not eligible for the LIHTC program. For a household comprised entirely of full-time students to occupy an LIHTC unit, the household must qualify in one of the following five categories:
Everyone in the household is married, and each person files a joint tax return with his or her spouse or is eligible to file a joint tax return with his or her spouse;
The household consists of a single parent and children, and nobody is listed as a dependent on another person's tax return except for the tax return of a child's other parent;
A member of the household receives welfare;
A member of the household participates in a job-training program; or
A member of the household was a foster child during his or her lifetime.
PRACTICAL POINTER: The IRS has established no age limitation on a full-time student. The IRS considers a child attending school in grades kindergarten through 12 to be a full-time student.
Rule #11: Determine eligibility for LIHTC units. If an applicant will occupy an LIHTC unit, but will not receive Section 8 rental assistance, the owner must qualify him for the LIHTC program. The applicant must:
Have an annual income that does not exceed the applicable LIHTC income limit; and
Meet the requirements of the LIHTC full-time student rule.
Rule #12: Determine eligibility for Section 8 units. While there are only two eligibility criteria for the LIHTC program—the income limit and the full-time student rule—for the project-based Section 8 program there are several other eligibility criteria you must apply before approving an applicant to receive assistance.
For an applicant who will receive Section 8 assistance, but who will not occupy an LIHTC unit, you must verify the applicant's eligibility for only the Section 8 program. The applicant must:
Have an annual income that does not exceed the applicable income limit for the Section 8 program;
Meet the requirements of the Section 8 student rule; and
Meet all of the remaining eligibility criteria for the project-based Section 8 program. The remaining eligibility criteria can be found in Chapter 3 of Handbook 4350.3.
Rule #13: Determine eligibility for Section 8/LIHTC units. If an applicant will occupy an LIHTC unit and receive Section 8 rental assistance, you must qualify him for both the Section 8 and the LIHTC programs. The applicant must:
Have an annual income that does not exceed the lesser of the applicable Section 8 or LIHTC income limit;
Meet all the requirements of the Section 8 student rule;
Meet all the requirements of the LIHTC full-time student rule; and
Meet all the remaining eligibility criteria for the Section 8 program.
EDITOR'S NOTE: See the August issue of the Insider's sister publication, Tax Credit Housing Management Insider, for the feature, “Avoid Three False Assumptions When Renting to Section 8 Prospects,” available online at www.taxcredithousinginsider.com.
Liz Bramlet: President, Liz Bramlet Consulting, LLC; (800) 784-1009; email@example.com.
Where to Find HUD and IRS Guidance
HUD provides guidance on how to determine whether an applicant qualifies for the Section 8 program in Chapter 3 of HUD Handbook 4350.3. You can download an electronic version of Chapter 3 at www.hudclips.com.
The IRS provides its guidance on qualifying for the LIHTC program through Section 42 of the federal tax code, through the Treasury Regulations found at Section 1.42, and through various revenue rulings, revenue procedures, and program notices.
Additionally, the IRS has issued a guide on how to comply with the LIHTC program: Guide for Completing Form 8823: Low Income Housing Credit Agencies Report for Noncompliance or Building Disposition. You can download an electronic copy of the 2011 version of the guide at www.lizbramletconsulting.com; click on “Hot Topics in Housing” for a link to download the guide. Chapter 4 of the guide includes detailed instructions on how to ensure that you rent a unit that you want to produce a tax credit to an applicant who is eligible for the LIHTC program.