LIHTC and the Minimum Set-Aside

Developing and owning affordable housing that has been funded in part by Internal Revenue Code Section 42 Low-Income Housing Tax Credits (“LIHTC”) comes with many rules and regulations that must be followed. Internal Revenue Code Section 42(g) sets out the minimum set-aside tests that a development must meet to qualify as a qualified low-income housing project. Meeting the minimum set-aside is one of the most critical requirements in the LIHTC program. Failure to initially meet the minimum set-aside before the end of the first year of the credit period results in the loss of all the LIHTCs allocated to the owner. Failing to meet the minimum set-aside in subsequent years can result in the recapture of previously claimed credits, as well as no credits being allowed until the minimum set-aside is met again.

The Minimum Set-Aside Explained

The minimum set-aside is an election that defines the minimum percentage of units that must be occupied by qualifying low-income households and the maximum level of income those households may earn, as a percentage of area median income (“AMI”). The minimum set-aside election is made on line 10c of IRS Form 8609 and is irrevocable. The minimum set-aside is measured on the last day of the tax year. The minimum set-aside election must be met for the entire compliance period to avoid recapture.

What Are the Choices?

IRS Form 8609 offers four minimum set-aside choices.

• 20-50 means that at least 20% of the project’s units must be rent-restricted and occupied by households with incomes at or below 50% of the AMI.
• 40-60 means that at least 40% of the project’s units must be rent-restricted and occupied by households with incomes at or below 60% of the AMI.
• Average Income means that at least 40% of the project’s units must be rent-restricted and occupied by households with incomes between 20% and 80% of AMI in 10% increments (20%, 30%, 40%, 50%, 60%, 70%, and 80%), however, enough units must be designated at or below 60% to average 60% AMI.
• 25-60 (N.Y.C. only) for developments located in New York City, the minimum set-aside is met if at least 25% of the residential units in the project are both rent-restricted and occupied by individuals whose income is 60% or less of the area median income.

Important Consideration

It’s especially important to pay attention to the minimum set-aside in a multiple building project. The IRS Form 8609 assumes that the owner is making each building its own “project” for tax purposes and if nothing is done to change that assumption, each building must meet the minimum set-aside. This means that if each building does not meet the minimum set-aside, it would be disqualified from the LIHTC program. Carefully completing Part II of IRS Form 8609 is imperative to the minimum set-aside.

Owners and managers should understand the minimum set-aside election made on IRS Form 8609 and ensure that it is met at the end of every tax year.

---

McKonly & Asbury, LLP is a leader in accounting for affordable housing developments. IRS and state housing finance regulations require specialized knowledge when preparing audits and taxes for affordable housing entities. Our team has the specialized knowledge needed to help ensure you comply with IRS and state housing finance agency reporting requirements. For more information on these services and more, be sure to visit our Affordable Housing page, and don’t hesitate to contact us.

The information presented in this post is intended solely for informational purposes and should not be construed as accounting advice from McKonly & Asbury, LLP.

About the Author

Related Industries