Today the IRS held a hearing on proposed Low-Income Housing Tax Credit (Housing Credit) Average Income Test Regulations, in which Emily Cadik, Executive Director of the AHTCC, and Michael Gaber, Chairman of the AHTCC Board of Directors and Executive Vice President at WNC, Inc. testified on behalf of the AHTCC. Fifteen organizations testified in the nearly five-hour hearing, including several AHTCC member organizations, all of which expressed serious concerns about the proposed regulations.
The IRS released proposed regulations in October 2020 that were intended to provide clarity around the ‘income averaging’ flexibility, the third minimum set-aside for the Housing Credit. The AHTCC, our partners and affordable housing champions in Congress initially advocated for the income averaging flexibility in order to make more types of affordable housing financially feasible and allow the program to serve a broader range of low-income tenants. It was first introduced in legislation in the Affordable Housing Tax Credit Improvement Act of 2017 and was enacted through the 2018 omnibus spending package.
However, the IRS’ proposed regulations regarding the Average Income Test would severely limit utilization of the income averaging flexibility, and are already having that effect in their proposed form.
“Many states actually have Qualified Allocation Plan provisions that require an income averaging election in order to score enough points to receive an allocation of 9 percent Housing Credits. This means that there is now a large share of Housing Credit developments that are at risk because of the proposed regulations, and it is affecting states’ ability to meet their housing goals too,” Gaber said during the hearing. “As a direct result of the Proposed Regulation Interpretation, many investors have taken the position that they are not currently willing to invest in Housing Credit properties that are utilizing the Average Income Test due to the risk of recapture.”
In addition to testifying at the IRS hearing, the AHTCC is currently working with Housing Credit supporters in Congress to clarify the legislative intent of the income averaging provision in the Affordable Housing Credit Improvement Act.
“Having been heavily involved in the drafting of the 2017 AHCIA, we are confident that the bill’s sponsors shared these views, and did not intend for the average income set-aside test to be more restrictive than the other two existing set-aside tests,” Cadik explained during the hearing. “Senate Finance Committee Chairman Ron Wyden, an original sponsor of the Affordable Housing Credit Improvement Act, confirmed in a letter to the AHTCC that he is ‘concerned that the recent regulations proposed by the Internal Revenue Service regarding the Average Income Test run contrary to the intent of the legislation and would dramatically weaken its intended benefits.’
Witnesses emphasized the heightened risk resulting from the proposal and difficulties that would arise from being unable to modify unit designations. Several highlighted the positive impact and successful implementation of the income averaging flexibility prior to the release of the proposed regulations, as well as the industry’s track record in providing safe, decent affordable homes that comply with Housing Credit and other federal, state, and local affordable housing program rules.
The IRS panel engaged with witnesses on numerous clarifying questions, particularly on the “cliff” that would result under the proposed regulations whereby isolated instances of noncompliance could threaten credits for an entire development. The panel questioned witnesses on what would be an appropriate response to properties which meet the set-aside requirement but are occupied by tenants whose average income has risen above 60 percent of the area median. Questions also focused on the process by which units could be redesignated and a reasonable timeline to remedy compliance issues.
AHTCC Comments in Response to the IRS Proposed Regulations
The AHTCC provided comments to the IRS in December 2020 expressing concerns that the IRS’ proposed regulations will severely limit utilization of the income averaging flexibility. The proposed regulations provide for substantially greater risk than either of the two existing set-aside tests in the Housing Credit program, with drastic and punitive consequences that serve as a deterrent to using the income averaging option. Under the proposed regulations for the average income set-aside, only a very small number of units leased to higher-income tenants would threaten the tax credits for the entire development, whereas with the existing two set-asides violations require a systematic failure to lease units to qualified tenants.
We also believe that the proposed regulation unduly penalizes serving tenants between 60 and 80 percent of area median income. Tenants below 80 percent of area median income are considered low-income for nearly all other affordable and assisted housing programs, and by enacting the income averaging flexibility Congress recognized the value of serving the full range of low-income tenants through the Housing Credit program. Temporarily serving a higher proportion of tenants between 60 and 80 percent of area median income until the original income mix can be restored should not cause a total failure of the development to qualify for the Housing Credit program. Additionally, the proposed regulation would prohibit the change in designation of the units once made, which would create numerous compliance issues.
To address these concerns and to ensure that income averaging remains a viable option, the AHTCC recommended that the IRS pursue alternative interpretations of the statute, which we believe are more closely aligned with the policies expressed in the original two set-aside tests and the risks that the investment community has accepted in making Housing Credit investments. We also recommended allowing for changes in unit designations, as well as recommendations related to mitigation remedies.
The IRS received 80 comment letters total in response to the proposed regulations, including several voicing support of the AHTCC’s concerns and recommendations.