Reminder of Federal Disaster Rules Relating to Section 42

person A.J. Johnson today 09/30/2017

With all the natural disasters that have occurred recently (Harvey, Irma, Maria), it is worthwhile to review IRS guidance relative to Low-Income Housing Tax Credit properties located in affected areas.   Disaster Relief Rules   Revenue Procedure 2014-49   This IRS Revenue Procedure provides temporary relief from certain requirements of §42 of the Internal Revenue Code (the LIHTC Program) for Agencies and owners if certain areas have been impacted by a major disaster. It also provides emergency housing relief for individuals who are displaced by a Major Disaster from their principal residences in certain Major Disaster Areas.   This procedure made some substantive changes to Revenue Procedure 2007-54, which was the major IRS guidance relative to tax credit properties and disaster areas prior to 2014-49. Key changes are (1) changes the reasonable restoration period for recapture relief and the tolling period for severely damaged, destroyed, or uninhabitable buildings in the first year of the credit period; (2) in determining qualified basis, uses the building’s qualified basis at the end of the taxable year immediately preceding the first day of the incident period as determined by FEMA, rather than at the end of the taxable year preceding the President’s Major Disaster declaration; (3) incorporates a temporary suspension of certain income limitations for Displaced individuals; (4) eliminates the need for self-certification of income eligibility; (5) permits an Agency to allow an owner within its jurisdiction to provide emergency housing relief to Displaced Individuals from other jurisdictions; (6) describes the consequences of providing emergency housing relief in the first year of the credit period and after the first year of the credit period; and (7) modifies the safe harbor relating to the amount of credit allowable to a restored building to provide relief in circumstances where the restoration cost is less than the eligible basis cost.   The procedure applies when the President has declared a Major Disaster. It applies to Displaced Individuals and to all §42 buildings, including those financed by Tax-Exempt Bonds. It also applies to all Agencies and owners both inside and outside States containing a Major Disaster Area.   Relief for Carryover Allocations   If an owner has a carryover allocation of credits for a building in a Major Disaster Area and the incident period for the Major Disaster began prior to the deadline for placing the building in service, the Agency may grant the owner an extension. If the Agency grants an extension (details of this process are explained below), the IRS will treat the owner as having satisfied the 10 percent of basis requirement of §42(h)(1)(E)(ii) if the owner meets the 10 percent requirement no later than the expiration of the Agency extension.   If the Major Disaster occurs on or after the date of the carryover allocation, the Agency may grant the owner an extension relative to the placed in service date for the building. In this case, the IRS will treat the owner as having satisfied the placed in service requirement of §42 if the owner places the building in service no later than the expiration of the extension.   If either the 10 percent requirement or placed in service requirement is not met by the end of the extension period, the credit will be returned to the Agency.   Procedure to Obtain Carryover Allocation Relief   Owners may not receive relief from Carryover Allocation rules unless the Agency that provided the allocation grants the relief.   Agencies may make the determination on an individual Project basis or determine that all owners or a particular group of owners in the Major Disaster Area need the relief provided by the revenue procedure. The extension may not be for more than six months after the date the owner would otherwise be required to meet the 10% of total development cost requirement. The extension may not extend beyond December 31 of the year following the end of the two-year period for placing a project in service, but can be for a shorter time period.   Recapture Relief   Generally, if, after the first year of the credit period, a building’s qualified basis is less than the qualified basis at the end of the prior tax year, credits for the applicable tax year will be reduced and recapture will result for prior tax years.   If a building’s qualified basis is reduced due to a casualty loss, a building is not subject to recapture if restored within a reasonable period of time. The HFA will determine what is reasonable in the case of a Major Disaster, but the extension may not extend beyond the end of the 25th month following the close of the month of the Major Disaster declaration. For example, if a major disaster is declared in September 2017, the deadline for restoration of qualified basis may extend no longer than October 2019.   In these cases, the qualified basis of the building allowable during the restoration period will be the building’s qualified basis at the end of the taxable year immediately preceding the first day of the incident period for the Major Disaster.   If the building is not restored within the reasonable restoration period determined by the HFA, the credit amount allowable will be based on the building’s qualified basis at the end of each year of the credit period. The HFA must report the failure to restore on IRS Form 8823.     Compliance Monitoring Relief   Agencies may extend the compliance monitoring due date for up to one year after a building has been restored and placed back in service. E.g., HFA compliance monitoring due in 2017, but building is down due to a disaster in a federally declared disaster area. Building is restored and placed back in service back in service May 1, 2018. State review will be due no later than May 1, 2019. However, if the State discovers that the building is out of compliance due to a Major Disaster, the Agency must report the noncompliance on Form 8823 and describe how the disaster contributed to the noncompliance.     Buildings in the First Year of the Credit Period   If a building is severely damaged or destroyed in a Major Disaster Area during the first year of the credit period, Agencies have the discretion to either (1) treat the allocation as a returned credit to the Agency, or (2) toll the beginning of the first year of the credit period. The tolling period shall not extend beyond the end of the 25th month following the close of the month of the Major Disaster declaration. Owners may not claim any credit during the restoration period. Agencies will report this relief as part of the 8610 process.   Amount of Credit Allowable to a Restored Building   Owners will receive no additional credits for the costs associated with restoring a building’s qualified basis. If money is spent on rehab and not on restoration, additional credits may be awarded.   Emergency Housing Relief   LIHTC projects may be used to house individuals displaced due to a Disaster Area declaration, but only with State Agency approval. This approval must specify the date on which the Temporary Housing Period for the Project ends. This period cannot exceed 12 months from the end of the month in which the President declared the Major Disaster.  
  • Protection of Existing Tenants:
    • No existing tenant whose income is, or is treated as, at or below the §42 income limit may have occupancy terminated solely to provide emergency housing for a Displaced Individual.
  • Rent Restrictions:
    • Gross rents for low-income units that house displaced individuals may not exceed the maximum gross rent that would apply under §42.
  Implementation of Emergency Housing Relief   The IRS Revenue Procedure authorizes, but does not require, provision of emergency housing relief to displaced persons. Owners are not required to provide such relief, nor are agencies required to permit it. If an owner chooses to provide relief, such relief may be provided for less than the full Temporary Housing Period. If a displaced individual qualifies as low-income under §42, the owner may rent to the individual as a low-income resident or provide temporary housing relief based on the guidance of the Revenue Procedure. Units occupied by displaced individuals will not be considered "transient" units for purposes of §42. Occupancy by displaced individuals may be disregarded for purposes of the available unit rule. However, the rule still applies to buildings where residents qualified under §42 exceed 140% of the applicable income limit. If a project is in the first year of the credit period and a unit is occupied by a displaced individual, the units is treated as low-income for (1) determination of qualified basis; and (2) meeting the elected minimum set-aside test.   Treatment of Units After the First Year of the Credit Period   If a Displaced Individual begins occupancy of a unit during the Temporary Housing Period, but after the first year of the credit period, the unit will retain the status it had immediately before that occupancy. Therefore, if the unit is a low-income unit, a market-rate unit, or a unit never previously occupied, it retains that status while occupied by a displaced individual, regardless of the income of the displaced individual.   Treatment of a Unit Vacated by a Displaced Individual   If a displaced individual vacates a unit before the end of the Temporary Housing Period, the unit retains the status it had prior to occupancy by the displaced individual, even if the next tenant does not occupy the unit until after the end of the Temporary Housing Period. Income Qualifications when Temporary Housing Period Ends   If a displaced person continues to occupy a unit in a project at the end of the temporary housing period, the status of the unit will be re-evaluated as though the individual moved into the project on the day immediately following the end of the temporary housing period. In other words, if the displaced person is not a qualified low-income tenant, the unit will be considered a market unit on the day after the end of the temporary housing period. If a project falls below the required minimum set-aside as a result of this determination, a 60-day period is allowed for correction.   Emergency Housing Relief - Recordkeeping   For each displaced individual, the following information must be kept in a statement signed by the displaced individual under penalty of perjury:
  1. The name of the displaced individual;
  2. The address of the principal residence at the time of the major disaster of the displaced individual;
  3. The displaced individual’s social security number; and
  4. A statement that he or she was displaced from his or her principal residence as a result of a major disaster and that his or her principal residence was located in a city, county or other local jurisdiction that is covered by the President’s declaration of a major disaster and that is designated as eligible for Individual Assistance by FEMA due to the major disaster.
  The owner must maintain a record of the Agency’s approval of the Project’s use for displaced individuals and of the approved Temporary Housing Period. The owner must report to the Agency at the end of the Temporary Housing Period a list of the names of the displaced individuals and the dates those individuals began occupancy. The owner must also provide the dates the individuals ceased occupancy and, if applicable, the date each unit occupied by a displaced individual became occupied by a subsequent tenant.        

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HUD Publishes 2025 Income Limits

On April 1, 2025, HUD published the 2025 income limits for HUD programs and the Low-Income Housing Tax Credit and Tax-Exempt Bond programs. The limits are effective on April 1, 2025. The limits for the LIHTC and Bond projects are published separately from those for HUD programs. For better understanding, LIHTC and Bond properties operate under the Multifamily Tax Subsidy Project (MTSP) limits. These properties are 'held harmless' from income limit (and therefore rent) reductions. This means that these properties may use the highest income limits for resident qualification and rent calculation since the project has been in service. However, it's important to note that HUD program income limits are not 'held harmless '. HUD publishes the 50% and 60% MTSP limits alongside the Average Income (AI) limits, which are set at 20%, 30%, 40%, 50%, 60%, 70%, and 80%. Projects that began service before 2009 may utilize the HERA Special Income Limits in areas where HUD has published such limits. Projects placed in service after 2008 cannot use the HERA Special Limits. Projects in rural areas not financed by tax-exempt bonds can use the higher MTSP limits or the National Non-Metropolitan Income Limits (NNMIL). It is important to note that for 2025, HUD has made changes to the definitions of geographic areas as determined by the Office of Management and Budget (OMB). The counties or towns within certain metropolitan areas may have changed. Owners and managers should consult the HUD Area Definition Report for a list of their areas and their components. The link to the Area Definition Report can be found on the website provided below. Owners of LIHTC projects may rely on the 2024 income limits for all purposes for 45 days after the effective date of the newly issued limits, which ends on May 16, 2025. The limits for HUD programs may be found at www.huduser.gov/portal/datasets/il.html. The limits for LIHTC and Bond programs may be found at www.huduser.gov/portal/datasets/mtsp.html.

Effects of Potential Staffing Cuts on HUD Programs

As the Trump administration moves forward with plans to reduce the federal workforce dramatically, the Department of Housing and Urban Development (HUD), according to recent reporting by the Associated Press, could face potential cuts that could eliminate half of its staff approximately 4,000 positions. Widespread Impact Across Essential Services The proposed reductions would affect numerous critical HUD programs, including disaster recovery efforts, rental assistance, housing discrimination investigations, and support for first-time homebuyers. Housing advocates and former HUD officials have raised substantial concerns that these extensive staffing cuts could greatly hinder or even stop the department s ability to carry out its mission. The official HUD position is that this information "should not be considered final. However, the potential extent of these reductions aligns with the administration s broader goal of reducing government spending. Recently appointed HUD Secretary Scott Turner announced the formation of a Department of Government Efficiency task force inspired by billionaire Elon Musk, while also underscoring the identification of "$1.9 billion in misplaced funds and "$260 million in wasteful contracts. Rental Assistance Programs at Risk The proposed cuts most concerning aspect is their potential impact on the Office of Public and Indian Housing, which could lose half its workforce from 1,529 employees to just 765. This office manages rental assistance subsidies for more than 3.5 million households and supports public housing for approximately 1 million people. Georgi Banna, general counsel for the National Association of Housing and Redevelopment Officials, warns that such reductions could delay payments for the Section 8 voucher program, which provides rental assistance to millions of low-income Americans. Although tenants have certain protections as long as they pay their share of the rent, they could ultimately face displacement if landlords withdraw from the voucher program due to payment issues. Budget Challenges Compound the Problem The potential staffing cuts come at a particularly challenging time as Congress continues to navigate a contentious appropriations process for HUD programs. The House version of the spending bill would boost funding for Housing Choice Vouchers by $115 million, which sounds promising but falls far short of the estimated $4.3 billion increase needed to simply maintain current service levels, according to the Center on Budget and Policy Priorities (CBPP). If the House budget is approved, it will only meet 90% of the need, potentially causing about 283,000 households to lose voucher access what the CBPP has described as the "most severe funding shortfall in the history of the voucher program. The situation has already caused damage, with some voucher-administering agencies halting the distribution of new vouchers. Local housing authorities have been operating on constrained budgets, and many lack robust reserves to weather a potential government shutdown or significant funding cuts. Fair Housing Enforcement Under Threat Perhaps the most alarming aspect is the proposed 77% reduction in the Office of Fair Housing and Equal Opportunity, which could shrink its staff from 572 employees to only 134. As HUD s main enforcer of national fair housing laws, this office investigates discrimination complaints and works to ensure equal access to housing. Although Secretary Turner has previously committed to upholding the Fair Housing Act, which includes a statutory mandate for HUD to combat discrimination, the administration s approach to implementing the law may undergo significant changes. Turner recently announced on social media that HUD had canceled $4 million in diversity, equity, and inclusion contracts. Uncertainty for Housing Authorities and Vulnerable Populations Potential staffing cuts and budget uncertainties have come together to create a tumultuous situation for local housing authorities. Housing authorities are finding it difficult to provide clear guidance to both families and landlords while anticipating potentially "draconian consequences if significant cuts or a government shutdown happen. The months ahead may pose unprecedented challenges and uncertainty for millions of Americans relying on HUD programs for stable housing, especially those using Section 8 vouchers. As Congress decides whether to pass a bill keeping the government open, the future of these critical housing programs and the millions of Americans who rely on them hangs in the balance. In conclusion, the proposed staffing cuts at HUD pose a significant threat to the stability and effectiveness of critical housing programs that serve millions of Americans. If carried out, these reductions could disrupt essential services like rental assistance, fair housing enforcement, and disaster recovery putting vulnerable populations at greater risk of housing instability and discrimination. The potential for delayed payments, reduced voucher access, and weakened fair housing protections highlights the profound human impact of these cuts. As Congress deliberates over HUD s budget, the stakes could not be higher for the families, landlords, and housing authorities that rely on these programs for their survival and stability. The coming months will challenge the resilience of HUD s mission and the nation s commitment to providing safe, fair, and affordable housing for all. All those in the affordable housing industry must reach out to their elected representatives to stress the importance of HUD and its programs to the housing needs of America s most vulnerable populations.

A. J. Johnson Partners with Mid-Atlantic AHMA for December Training on Affordable Housing—April 2025

In April 2025, A. J. Johnson will partner with the MidAtlantic Affordable Housing Management Association for four live webinar training sessions for real estate professionals, particularly those in the affordable multifamily housing field. The following sessions will be presented: April 15: Pets/Pot/Service Animals: Navigating Fair Housing A Comprehensive 90-Minute Webinar for Housing Professionals Join us for an essential training session that tackles three of the most challenging areas in fair housing compliance today. This practical webinar will equip affordable housing providers with clear guidance on: Service and Emotional Support Animals: Learn the crucial legal distinctions between pets and assistance animals, proper verification procedures, and how to handle accommodation requests while complying with FHA regulations. Pet Policy Development: Explore effective strategies for creating and enforcing fair pet policies that address resident needs while considering property management concerns. Medical Marijuana Considerations: Explore the intricate relationship between federal and state laws concerning medical marijuana use in housing, including the requirements for reasonable accommodation. Through case studies, interactive discussions, and expert analysis of recent court decisions, you will gain actionable strategies for confidently addressing these challenging issues. This tool is perfect for property managers, leasing agents, compliance officers, and housing administrators who want to minimize legal risk while creating inclusive communities. April 16: VAWA with Tips on Communicating with Victims - The Violence Against Women (VAWA) Reauthorization Act of 2013 expanded VAWA protections to many different affordable housing programs, including the Low-Income Housing Tax Credit (LIHTC) Program. While HUD has provided detailed requirements on VAWA implementation at HUD properties, there has been no uniform guidance for LIHTC owners and managers. A proposal before Congress would legislate that LIHTC Extended Use Agreements contain VAWA requirements. The IRS has not provided guidance, and while many state agencies are requiring VAWA plans, they are not providing information on what the plans should look like. This two-hour training, when combined with the course materials, will review VAWA requirements and recommend best practices for developing VAWA plans at LIHTC and other non-HUD properties. The session will be presented by A. J. Johnson, a recognized expert in the affordable housing field and the author of "A Property Manager s Guide to the Violence Against Women Act. April 24: Preparation for Physical Inspections - Agency inspections of affordable housing properties are required for all affordable housing programs, and failure to meet the required inspection standards can result in significant financial and administrative penalties for property owners. This four-hour training focuses on how owners and managers may prepare for such inspections, with a concentration on HUD NSPIRE inspections and State Housing Finance Agency inspections for the LIHTC program. Specific training areas include (1) a complete discussion of the most serious violations, including health & safety; (2) how vacant units are addressed during inspections; (3) when violations will be reported to the IRS; (4) the 20 most common deficiencies; (5) how to prepare a property for an inspection; (6) strategies for successful inspections; and (7) a review of the most important NSPIRE Standards as they relate to the three inspectable areas [Units/Interior/Exterior]. 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Hoarding is the one class of disability that requires landlords to offer an accommodation even if an accommodation is not requested! This 1.5-hour live webinar is designed to assist multifamily managers in understanding how to deal with hoarding problems in a way that will prevent liability under fair housing law. The session will define hoarding and provide detailed recommendations on how to deal with a hoarding problem. It will outline examples of accommodations for hoarding, how to engage in the "interactive process with residents who hoard, and the steps necessary to remove uncooperative residents. Finally, a recent court case regarding hoarding will be reviewed as an illustration of the potential difficulties managers face in hoarding situations. This is an evolving area of fair housing law, and this webinar will provide the guidance necessary to approach the problem in a systematic way that will give multifamily operators the best chance at avoiding the legal traps that exist when dealing with this unique disability. These sessions are part of the year-long collaboration between A. J. Johnson and MidAtlantic AHMA and are designed to provide affordable housing professionals with the knowledge to effectively manage the complex requirements of the various agencies overseeing these programs. Persons interested in any (or all) training sessions may register by visiting either www.ajjcs.net or https://www.mid-atlanticahma.org.

Impact of Trump Administration's Regulatory Restructuring on HUD and IRS

The Trump administration's recent executive order on federal regulations, "Ensuring Lawful Governance and Implementing the President's 'Department of Government Efficiency' Deregulatory Initiative," signals significant changes for federal agencies. The order has particularly notable implications for the Department of Housing and Urban Development (HUD) and the Internal Revenue Service (IRS). The New Regulatory Framework On February 19, 2025, President Trump signed this executive order as part of a broader deregulatory agenda aimed at reducing what the administration views as bureaucratic overreach. The directive mandates that federal agencies conduct a comprehensive 60-day review of their regulatory frameworks to ensure alignment with both legal requirements and administration policies. The order targets explicitly regulations considered: Unconstitutional Based on improper delegations of legislative power Imposing excessive costs without clear public benefits Harmful to national interests Hindering development across various sectors This order is part of a series of regulatory rollbacks, including directives like "Ensuring Accountability for All Agencies" and "Unleashing Prosperity Through Deregulation," which expand upon the administration's previous deregulatory efforts. Specific Impacts on the IRS The IRS faces several significant challenges under this new directive: Continued Hiring Freeze: The executive order maintains an existing hiring freeze at the IRS, which will remain in effect until the Treasury Secretary, in consultation with the Office of Management and Budget (OMB) Director, determines that lifting it serves the national interest. Increased White House Oversight: IRS regulations will once again be subject to White House review through the Office of Information and Regulatory Affairs (OIRA), reinstating a policy from Trump's first term that adds another layer of scrutiny to IRS rulemaking. "10-for-1" Deregulation Mandate: The IRS must eliminate ten existing guidance documents for every new rule or guidance it issues, significantly constraining its ability to update tax regulations and provide new guidance. These measures could substantially impact the IRS's capacity to uphold compliance and maintain operational efficiency, potentially affecting tax administration and enforcement nationwide. Implications for HUD For the Department of Housing and Urban Development, the executive order brings equally significant changes: Comprehensive Program Review: The order requires a review of hundreds of HUD programs, potentially leading to significant restructuring or budget cuts. Grant Funding Uncertainty: Although a federal court temporarily blocked a separate memo seeking to freeze federal grants, the administration's intent to reassess HUD funding remains evident. "10-for-1" Rule Application: Like the IRS, HUD must adhere to the requirement of eliminating ten existing regulations for every new one proposed, which could significantly impact housing policy implementation and program management. These changes may affect HUD's ability to administer housing assistance programs, enforce fair housing regulations, and support community development initiatives. Legal and Procedural Challenges The administration's deregulatory push faces potential legal obstacles: Agencies seeking to rescind or modify rules must generally follow a new rulemaking process, including issuing a Notice of Proposed Rulemaking, collecting public comments, and finalizing the new rule. Failure to adhere to these procedural requirements could expose regulatory rollbacks to legal challenges under the Administrative Procedure Act (APA). The APA requires agencies to engage in reasoned decision-making when modifying or rescinding regulations, and courts may overturn agency decisions if this standard is not met. Outlook As the 60-day review period progresses, the IRS and HUD must navigate competing demands: implementing the administration's deregulatory agenda while maintaining their core functions and avoiding legal challenges. The outcome will likely reshape how these agencies operate and could have lasting implications for the United States s tax administration and housing policy. The full impact of these changes will become more evident as agencies determine which regulations to target and how to implement the administration's directives while fulfilling their statutory obligations.

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