IRS Provides Clarity on LIHTC Income Limits

The Internal Revenue Service recently released revenue ruling 2020-4 that instructs taxpayers how to calculate Low-Income Housing Tax Credit (LIHTC) income limits should they choose to use the income averaging minimum set-aside test to meet LIHTC eligibility and compliance requirements.

This test was created by the Consolidated Appropriations Act of 2018 to complement the existing tests established by the Tax Reform Act of 1986 and allows LIHTC projects to serve households earning as much as 80% of Area Median Gross Income (AMGI) as long as the average income limit for LIHTC units in the property is 60% or less of AMGI.

Two minimum set-aside tests were set forth in the Tax Reform Act of 1986: The "20-50" test stipulates that at least 20% of the residential units in a building are rent restricted and occupied by households with incomes that are less than 50% of the area median gross income. The percentages are 40% and 60% respectively, if a taxpayer elects to use the "40-60" test.

The Consolidated Appropriations Act of 2018 provides investors with more flexibility, although once the project owner elects the average income set-aside test, it is irrevocable.

David Logan, NAHB’s director of tax and policy analysis, provides further analysis in this Eye on Housing blog post.