REST Easy with Mahoney July 2022

Here are some dates we will use in below examples:

• Acquisition date is June 1, 2020
• Rehab placed in service date is April 30, 2021
• Household A moved in on May 1, 2020
• Household B moved in on June 1, 2015

When a building is purchased and operating with tenants currently living in it, the building is ready for its intended purpose and the acquisition date becomes the date tax credits can begin. Using our example dates, tax credits could begin June 1, 2020. However, if the rehabilitation is not complete until 2021, the acquisition credits are deferred one year. In this case both acquisition and rehab credits will begin in 2021 and any tenant qualified up until January 31, 2021 will have credits on that unit for the entire year of 2021.

When you purchase an existing building, most of the units will be occupied. For all occupied units, the owner has 120 days before and after the acquisition date to complete tenant income certifications. If completed within the 120 days, the units will be income certified as of the acquisition date. 

There are a couple of rules that apply to income certifications for acq/rehab deals – typically called the “Safe Harbor” and “Grandfathering.”

Safe Harbor Rule

What happens if you purchase an existing building in 2020 and a household’s income goes over the income limit by the first year of the credit period (2021)? Do you have to evict that household? Thanks to IRS Revenue Procedure 2003-82 the answer is no.

If Household A’s income was certified and below the income limit as of June 1, 2020, but it increased in December 2020 above the income limit, that household would still be considered a low-income unit as of the first year of the credit period, 2021, as long as the rent is properly restricted. If the household is over the income limit, the next available unit rule is applied.

Grandfathered Tenants

What happens with household in place on the acquisition date if the existing building you purchased was previously a tax credit project and you plan to rehabilitate the project using a new allocation of LIHTCs, also known as a re-syndication?

In this case, the 8823 Guide states that “Households determined to be income-qualified for purposes of the IRC §42 credit during the 15-year compliance period are concurrently income-qualified households for purposes of the +30-year extended use agreement. As a result, any household determined to be income qualified at the time of move-in for purpose of the extended use agreement is a qualified low-income household for any subsequent allocation of IRC §42 credit.”

This means that Household B would be “grandfathered in” (qualified unit) even if they are over the income limit as the new acquisition date. If Household B was over the income limit, the household could remain in its unit, but would be subject to the next available unit rule. 

A couple of caveats: 

First, it should be noted that in the case of a re-syndication, some investors or state agencies do not follow this rule and may still require an owner to prepare new income certifications for all existing tenants. 

Second, an owner will most likely have to test each household for student status, as the state agency may not have required that during the extended use period.