The LIHTC Section 42 program includes Internal Revenue Code compliance requirements and other regulations. It is important for tax credit professionals to understand tax credit program rules, which include potentially severe consequences for violations.
LIHTC compliance: Be proactive, not reactive
The most dreaded number in the LIHTC world is 8823, the federal IRS form that documents noncompliance. In the worst case scenario, affordable housing developments can be subject to substantial tax credit recapture penalties, with investors losing some or all of their investment. Severe violations can also bar developers and property managers from participating in new projects.
Restrictions also come into play in the acquisition and redevelopment of affordable housing properties. Without proper planning and oversight, noncompliance problems can arise when LIHTC are combined with other programs such as RD (USDA Rural Development), tax-exempt bonds (4% LIHTC) and HOME funds (the HOME Investment Partnerships Program).
State and territorial housing credit agencies play significant roles in Section 42 enforcement. Although the LIHTC program is federal, states play a substantial part in regulatory oversight while imposing their own additional requirements.
Developers and property managers should be proactive in avoiding violations. Compliance violations claims should be addressed thoroughly and as soon as possible in order to avoid further consequences.
The end of each tax year (which usually corresponds with the end of the calendar year) poses additional challenges if compliance issues remain outstanding. Click here to learn more about preparing for year-end LIHTC compliance issues.
Avoid the high cost of LIHTC compliance violations. TheoPRO can train your team members throughout the US to earn their HCCP (Housing Credit Certified Professional) and SHCM (Specialist in Housing Credit Management) accreditations.
Affordable housing becomes easier to understand once you have learned its lexicon. For a guide to common industry terminology, click here for our Affordable Housing – LIHTC glossary.
Section 42 rent, income and documentation requirements
The LIHTC program maintains restrictions intended to restrict affordable housing to qualified households, including restrictions on maximum household incomes, rent limits (“gross rent”) and utility allowances that reduce the maximum allowable rent (“net rent”). Inaccurate calculations can result in penalties for compliance violations, even when errors are made in good faith and refunds are provided to tenants.
LIHTC tenants are also subject to specific income verification, lease documentation and other paperwork requirements that vary by state/territory.
There are critical differences between LIHTC projects that are “mixed use” (affordable developments that include market-rate units) and those that are 100% tax credit. The “next available unit” rule creates ongoing opportunities for violations at mixed-income projects.
Regulations governing full-time students also create risk of noncompliance. Even minor children who are full-time students have to be considered in determining compliance.
LIHTC compliance remains a factor even after the federal requirements end after Year 15. States maintain restrictions following the end of the federal compliance period for at least an additional fifteen years.
Combining Section 42 tax credits with Section 8 rental contracts (both project-based HAP and PBV project-based vouchers) for acquisition-rehab properties can create complications. Click here to learn more.
Section 42 LIHTC compliance education and services: Customized and on-demand
Westmont Advisors is proud to partner with LIHTC compliance experts TheoPRO to offer development compliance services and Section 42 training programs for LIHTC professionals, including property managers, developers, asset managers, syndicators and government agencies.
Proactive management will reduce the likelihood of LIHTC compliance problems and make those issues more manageable when they do arise.
TheoPRO can play important roles in all aspects of your compliance process, including planning, operations oversight, training and disposition:
- Acquisition and development planning, including mixed-income redevelopments and projects that combine different programs such as HOME, Rural Development and tax-exempt private activity bonds.
- Video-on-demand and personalized Section 42 training programs for property managers, asset managers, developers, investors, syndicators, housing agencies (federal, state and local) and other affordable housing professionals.
- Operational support for asset management, developers and property managers, including file review, compliance oversight and asset management training.
Asset managers and property managers can be best served by LIHTC compliance training that addresses their specific job requirements. Click here to learn more.
TheoPRO is led by founder Vivian Probst, one of the nation’s leading experts in Section 42 LIHTC compliance. Let TheoPRO and Westmont customize a program for you.
We offer training and other services throughout the United States. Contact us to learn more.
Westmont and our partners at TheoPRO can serve your needs throughout the United States. Please do not hesitate to contact us for more information about our consulting and advisory services for real estate acquisition, asset management and tax credits, including the Low Income Housing Tax Credit (LIHTC) and Historic Tax Credit (HTC), as well as other real estate matters. Click here to learn more about our team.
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