Acquisition Rehab Dates and Deadlines... 10/17/18 For more information:...

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www.preferredcompliance.com 10/17/18

For more information: jilliant@preferredcompliance.com 1

Acquisition RehabThe Dates and Deadlines

10/17/18Add a footer

From Allocation to Lease-Up

• Placed in Service

• Qualifying Residents

• Effective dates

• Tack‐back Rule

• Moving in residentso Existing

• First Year Applicable Fraction

Placed in Service• IRS Revenue Notice 88‐116

“For purposes of Section 42, the term ‘placed in service’ has two definitions • one for buildings

• one for rehabilitation expenditures that are treated as a separate new building [Section 42(e)(1) and (e)(4)(A)].”

PIS New or Existing Buildings• New or existing building: the date on which the first unit in the building is certified as being suitable

for occupancy in accordance with state or local law.

• New construction will normally result in a Certificate of Occupancy (CO) or Temporary Certificate of Occupancy (TCO);

• A transfer of a building to a new owner results in a new placed in service date if, on the date of the transfer, the building is occupied or ready for occupancy; and

Qualifying Residents• 120 days on either side of

acquisition to qualify existing residents

• Can exceed income limit at start of TC year (what…?)

• If household is qualified more than 120 days AFTER acquisition, effective date is date last adult resident signed.

*Let’s discuss Safe Harbor for a sec.

120 Day Rule (existing residents)

4/30/18 8/27/18

120 days

1/01/18

120 days

4/30/18 8/27/18

120 days

1/01/18

120 days

If qualified outside of the 240 days…cert is no good!

120 Day Rule

5/30/18 9/26/18

120 days

1/31/18

120 days

What happens if there’s a delay and PIS moves?

8/27/18

120 days

1/01/18

120 days

4/30/18

Scenario 1:

A household is income qualified within the allotted 120 days prior to PIS, income rises above the applicable limit at time of PIS, the household remains qualified.

Scenario 2:

A household was income qualified in a previous allocation but is now over the applicable income limit. If initially income qualified at the proper limit, household remains qualified.

Grandfathering

8823 Guide pg 4‐27

4/30/18 8/27/18

120 days

1/01/18

120 days

Qualified with previous allocation

REGARDLESS of household income

Effective Dates

Existing Residents

If qualified within the 120 days before or after the acquisition date…Effective date is the same as the acquisition date.

New Residents

Regardless of when qualified (inside or outside the 120 days window) the effective date is the day they take possession of the unit.

4/30/18 5/27/18

Effective date on TIC will be the date of acquisition

Acquisition date 120 days120 days

120 Day Rule (NEW residents)

Effective date will be the day they take possession of the unit!

5/1/18

Tax Credit Calculation

Tack-Back Rule• IRC §42(D)(2)) states that an owner cannot claim acquisition credits unless it

can also claim rehab credits (at the same time).

• IRC§42(f)(5)) says that Year 1 of the tax credit period for an existing (or “acquisition”) building does not begin prior to the year the rehab is deemed complete.

• The applicable fraction for the rehab building is the same as for the acquisition building, including the weighted‐average applicable fraction for Year 1. (we’ll look at this later!)

Tack-Back RuleThat means…

• Qualified LIHTC units can count for the first‐year applicable fraction for both buildings all the way back to the first full month the building is in service after acquisition.

• But if acquisition was in a year prior to rehab is completed, qualified units can count only as early as the beginning for Year 1 of the credit period.

Tack-Back Rule

Jan 1, 18

Acquired 10/21/17

Jan 1, 18 8/11

Acquired 3/1/18

Rehab completed

Eligible Basis 10,000,000x DDA/QCT 130%Adj EB 13,000,000x Applicable Fraction 67%Qualified Basis 8,710,000x TC percentage 7.25%Annual TC 631,475

First year applicable fraction is based on a weighted average.

We start our average with the first FULL month after placed in service, once a qualified household has moved in.

Placed in Service Month

14 16 17 18 19 20

22 23 24 25 26 27

29 30 31

Placed in service

Leased to a qualified household

Month counts!!!

First year applicable fraction is based on a weighted average.

We start our average with the first FULL month after placed in service, once a qualified household has moved in.

Placed in Service Month

14 16 17 18 19 20

22 23 24 25 26 27

29 30 31

Placed in service

Leased to a qualified household Nice try but NOT A

FULL MONTH!!!

1 Bedroom= 600 sq ft2 Bedrooms= 720 sq ft

Total building sq ft=7,920

Placed in service June 3

June 0 0

July 17% 17%

August 25% 24%

September 42% 41%

October 67% 65%

November 75% 74%

December 92% 91%

Unit Fraction Fl Sp Fraction

1 Bedroom= 600 sq ft2 Bedrooms= 720 sq ft

Total building sq ft=7,920

Placed in service June 3

June 0 0

July 17% 17%

August 25% 24%

September 42% 41%

October 67% 65%

November 75% 74%

December 92% 91%

318% 312%10/17/18Add a footer

June 0 0

July 17% 17%

August 25% 24%

September 42% 41%

October 67% 65%

November 75% 74%

December 92% 91%

318% 312%

312%/12 months= 26%

First year applicable fraction is 26%

Take the weighted average by dividing by ALL 12 months of the year.

Eligible Basis 10,000,000x DDA/QCT 130%Adj EB 13,000,000x Applicable Fraction 67%Qualified Basis 8,710,000x TC percentage 7.25%Annual TC 631,475

$245,050

10 Yr Tax Credit Period

If we calculated annual credits to be $631,475, how much will we collect in year 1?

$245,050 in credits

$386,425 in credits

What about in year 11?

What if we don’t hit our thresholds?

Minimum Set‐Aside and Applicable Fraction

The Thresholds

Minimum Set‐Aside

• Project or building‐based

• Unit Fraction

• Are we getting credits?

Application Fraction

• Building based

• Lower of Unit & Floor Space Fraction

• How many credits are we getting?

Minimum Set‐Aside 40%

Applicable Fraction 67%

By year end, we haven’t hit out minimum set‐aside

NO CREDITS EVER…..OR you can defer Year 1 of the credit period

By year end, we’ve hit out minimum set‐aside, we are getting credits!!!

But how many are we getting?

If we don’t hit the applicable fraction in Year 1, the tax credit period for this building is now 15 years. YIKES!

Non-Compliance & The 8823

The project must remain compliant for at least 15 years.

This responsibility falls to the property managers and leasing agents.

State housing agency will perform a file AND physical inspection. They will look at a minimum of 20% of the files.

If gross non‐compliance is found, they may look at up to 100% of the files.

Common things they look for:

Missing documentation, like verifications, certifications, and addendums;Documentation dated within 120 days from the effective date;Over‐income residents;Broken smoke detectors and sprinklers;Health and safety issues

The state monitoring agency will send their own inspector or a contractor of the state.

The state will visit within 2 years from when the last building was PIS.

Be cooperative in scheduling inspections!

If non‐compliance is found an 8823 may be issued by the state.

Over‐Income!

Form 8823 is the Report of Noncompliance. If corrections were made, they will be noted differently on the form.

Not all non‐compliance will result in recapture.

The state monitors the project and reports any non‐compliance found using Form 8823.

The IRS reviews the Form 8823 issued and determines if recapture or disallowance of credits is appropriate.

There are two types of non‐compliance: Correctable and Not Correctable.

Correctable Non‐compliance Not Correctable

Documentation issuesMessy/bad filesCalculation errorsVerification issues

Over‐charging rent

Let’s say the inspector found missing income documentation. We can correct this one of two way.

This is true and correct as of xx/xx/xxxx (effective date).10/17/18Add a footer

The IRS takes a hard stance on over‐charging rent.

If rent is over‐charged by $.01 even once, no credits can be taken on that unit for the year. EVEN IF rent was corrected and the resident was refunded or credited the over‐charged amount.

Not‐correctable Non‐compliance

Record Retention

• Initial files must be kept for 21 years.• Subsequent files must be kept for 6 years.• IRS allows electronic files. Check with state to see if they do as well.• Must keep records of move‐ins and outs, rents, subsidies and vacancies

Acquisition Rehab Dates and Deadlines... 10/17/18 For more information:...

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