The end of each tax year poses unique challenges for Section 42 LIHTC properties. For most affordable housing developments, those challenges make December 31 an especially important day.
It is imperative to make sure that your Section 42 house is in order prior to year’s end. Issues that remain unresolved after December 31 move into a critical, more risky position.
Lease-up risk and LIHTC compliance
Units that have not been leased in a building during its initial lease-up year can carry a significant price tag: The loss of credits for both Year 1 and 15 that result in years of reduced credit flow or credits delay for an entire year.
The IRS allows credits to begin flowing in either the year that a building is placed in service or else during the following year. Problems can arise if investors negotiated their pricing based upon earlier delivery. Units that are not occupied for the first time by December 31 can wreak havoc on investor projections and available equity.
Section 42 year-end checklist
Any outstanding issues involving units, tenant files, physical condition and income and rent limits become more critical once the tax year has ended.
The affordable housing compliance experts at TheoPRO recommend prioritizing these issues:
- Correct as many outstanding compliance issues as possible: Identify any non-compliance issues of which you are aware and correct them to the greatest extent possible. For example, any units occupied by unqualified households should be issued appropriate notices and otherwise kept in compliance with landlord-tenant laws.
- Utility allowances should be updated: If adjustments to utility allowances call for rent reductions, then notify tenants immediately.
- Prioritize any past due and incomplete tenant recertifications: LIHTC tenants need to be recertified annually, but property managers invariably deal with tenants who are not eager to comply. If recertifications are past due and not completed, pay a holiday visit to families and assist them in resolving their paperwork issues.
- Address all outstanding 8823s: Alleged LIHTC violations are reported to the IRS on form 8823. Close out what you can and document any reasons for delays in correcting any 8823s. Although owners have 90 days to cure deficiencies, correcting outstanding items after the end of the year poses greater challenges.
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.
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.
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