HOTMA Adds New Income Exclusions for Affordable Housing Projects
Introduction
In February 2023, the U.S. Department of Housing and Urban Development (HUD) published the Final Rule implementing the Housing Opportunity Through Modernization Act (HOTMA). Subsequently, on September 29, 2023, HUD released Notice H 2013-10, offering additional guidance and clarifications regarding the implementation of the Final Rule. Among the many changes, HUD has added a number of new income exclusions, impacting a broad spectrum of HUD-assisted properties, projects under the Rural Housing Service Section 515 program, the Low-Income Housing Tax Credit (LIHTC) program, and properties with Tax-Exempt Bonds. This article will delve into the essential changes in income exclusions that affordable housing managers must acquaint themselves with.
Note: This article does not address all income exclusions listed in 24 CFR §5.609(b), but only those that are newly added or updated by the final rule.
Nonrecurring Income
The nonrecurring income exclusion replaces the former exclusion for temporary, nonrecurring, and sporadic income (including gifts), but it provides a narrower definition of excluded income in contrast to the former broad exclusion of temporary, nonrecurring, or sporadic income.
Income that will not be repeated beyond the coming year (i.e., the 12 months following the effective date of the certification), based on information provided by the family, is considered nonrecurring income and is excluded from annual income. However, income received as an independent contractor, day laborer, or seasonal worker is not excluded from income, even if the source, date, or amount of income varies.
Income that has a specific end date and will not be repeated beyond the coming year during the family’s upcoming annual reexamination period will be excluded from a family’s annual income as nonrecurring income. This does not include unemployment income and other types of periodic payments that are received at regular intervals (such as weekly, monthly, or yearly) for a period of greater than one year that can be extended. For example, an increasing number of cities and states are piloting guaranteed income programs that have discreet beginning and end dates. This income can be excluded as nonrecurring in the final year of the pilot program.
For example, for an annual reexamination effective 2/2/24, guaranteed income that will be repeated in the coming year but will end before the next reexamination on 2/1/25 will be fully excluded from annual income.
Income amounts excluded under this category may include but are not limited to, nonrecurring payments made to the family or to a third party on behalf of the family to assist with utilities, eviction prevention, security deposits to secure housing, payments for participation in research studies depending on the duration, and general one-time payments received by or on behalf of the family.
Following are examples of income that may be excluded:
- Payments from the U.S. Census Bureau for employment lasting no longer than 180 days and not culminating in permanent employment;
- Direct federal or state economic stimulus payments;
- Amounts directly received by the family as a result of state refundable tax credits or state tax refunds at the time they are received;
- Amounts directly received by the family as a result of federal refundable tax credits or federal tax refunds at the time they are received;
- Gifts for holidays, birthdays, or other significant life events or milestones (e.g., wedding, baby shower, or anniversary gifts);
- In-kind donations (e.g., food, clothing, or toiletries received from a food bank or similar organization);
- Lump-sum additions to net family assets (e.g., lottery winnings, contest winnings, etc.);
- Income of Live-in Aides, Foster Children, and Foster Adults (note that the exclusion of income for foster children and adults is a change from current regulation);
- Payments received for the care of Foster Children or Adults or State or Tribal Kinship or Guardianship Care Payments;
- Insurance payments or settlements for personal or property losses, including but not limited to payments under health insurance, motor vehicle insurance, and workers’ compensation (note that periodic payments paid at regular intervals (such as weekly, monthly, or yearly) for a period of greater than one year that are received in lieu of wages for workers’ compensation continue to be included in annual income;
- Amounts recovered in a civil action or settlement based on a claim of malpractice, negligence, or other breach of duty that resulted in a member of the family becoming disabled. Such funds are excluded whether received periodically or in a lump sum;
- Veterans Regular Aid and Attendance payments made to veterans. This exclusion applies only to veterans and not to surviving spouses or other beneficiaries;
- Home-based care payments for a disabled family member. The payments are excluded from income as long as the amounts are provided to enable a disabled family member to remain in the unit. Both the person providing the care and the disabled person must be family members (not household members) and must live in the same household;
- Replacement housing “gap” payments are made under the Uniform Relocation Act (URA) as long as the payments cover actual increased out-of-pocket costs of rent and utilities.
PHAs/Owners may accept a self-certification from the family stating that the income will not be repeated during the coming year.
Student Financial Assistance
The treatment of student financial assistance depends on the HUD program,
student/household characteristics, and the type of financial assistance received by the student. The student financial assistance rules apply to both full-time and part-time students.
Student financial assistance to be excluded includes,
- Amounts received under Section 479B of the Higher Education Act (HEA) of 1965, as amended, including
- Federal Pell Grants;
- Teach Grants;
- Federal Work Study Programs;
- Federal Perkins Loans;
- Student financial assistance received under the Bureau of Indian Education;
- Higher Education Tribal Grant;
- Tribally Controlled Colleges or Universities Grant Program; and
- Employment Training Program under Section 134 of the Workforce Innovation and Opportunity Act (WIOA)
- Other Student Financial Assistance, including grants or scholarships received from the following sources:
- The Federal government;
- A State (including U.S. territories), Tribe, or local government;
- A private foundation registered as a 501(c)(3) nonprofit;
- A business entity (such as a corporation, general partnership, LLC, LP, joint venture, business trust, public benefit corporation, or nonprofit entity); or
- An institution of higher education.
- Student financial assistance does not include –
- Financial support provided to the student in the form of a fee for services performed (e.g., a work-study or teaching fellowship that is not excluded under the HEA; or
- Gifts, including gifts from family or friends.
Other than funds excluded under the HEA, all student financial assistance must pay for actual educational expenses.
Actual covered costs include tuition, books, supplies, room and board, and fees required and charged to a student by an institution of higher education. For a student who is not the head, co-head, or spouse, actual covered costs also include the reasonable and actual costs of housing while attending school and not residing in the assisted unit.
The only situation in which HEA assistance is not automatically excluded from income is in the case of a Section 8 household during years in which a HUD appropriations act specifically requires that educational assistance in excess of actual educational costs be included in income for Section 8 households. In such years, all educational expenses in excess of actual cost will be included in income – including assistance that is part of the HEA. However, in such years, for students who are over the age of 23 with dependent children, the HEA assistance will be excluded.
Conclusion
The exclusions noted in this article apply to all affordable housing programs that are required to follow HUD rules when determining annual income. This includes not only projects with HUD assistance but also LIHTC properties, Rural Development Section 515 projects, Tax-Exempt Bond Projects, Housing Trust Fund Projects, and HOME projects (in most cases). Owners and managers operating properties under these programs should familiarize themselves with these new income rules and be prepared to put them into effect on January 1, 2024.