We all know Affordable Housing Compliance is complicated, often confusing and potentially very costly when properties are out of compliance. Handling casualty losses in the affordable tax credit arena is a case in point.
Casualties get separate treatment
Disasters create particularly difficult situations for affordable housing owners and residents. Congress and the IRS have enacted laws and procedures in the attempt to help owners recover from the casualty event. Unfortunately, the laws end up treating casualty events separately from other disaster responses. We must be aware of the differences to protect our properties properly.
The IRS created Revenue Procedure 2007-54 to provide temporary relief from Internal Revenue Code §42 requirements for owners of low-income housing buildings in major disaster areas declared by the President.
A memorandum from the Chief Counsel of the IRS states the law:
“A building (1) that is beyond the ﬁrst year of the credit period and (2) that, because of a disaster that led to a major disaster declaration, has suffered a reduction in qualiﬁed basis that would cause it to be subject to recapture or loss of credit, will not be subject to recapture or loss of credit if the building’s qualiﬁed basis is restored within a reasonable restoration period.”
The compliance monitoring agency with §42 for a given building designates what the reasonable restoration period should be. The period cannot exceed 24 months after the calendar year in which the President declares a major disaster for the location. The building owner must restore the building within that period or face penalties: loss of all credit claimed during the restoration period and recapture for any previous years of claimed credit under the stipulations of §42(j)(1).
“This means that owners can continue claiming credits for casualty situations in designated disaster areas,” says Greg Proctor, Vice President of Affordable Housing Solutions at RealPage, Inc. “But it doesn’t cover properties with casualty losses outside those areas. It doesn’t cover the owner of a building in which a ﬁre has damaged many of the units. If, within the agency-designated reasonable restoration period, the owner restores the building through replacement or reconstruction, they will be provided relief from recapture of previously earned credits by Internal Revenue Code 42(j)(4)(E). Unfortunately, this ruling doesn’t grant authority to claim the credit within the time period in which the building is being restored. Basically, we’re seeing two casualty losses with two different outcomes.”
The situation has sparked discussions and has turned up some interesting discoveries, like the following: the IRS stipulation states that tax credits after the ﬁrst year are annual credits, with the credit determined at the end of the taxable year. Credit is determined on a monthly basis only for the ﬁrst year of the credit period. Disallowing credits on a monthly basis is not possible otherwise.
Consequences for property owners
So, what is the net effect on owners of properties dealing with casualty losses? As you would expect from the discussion above, there are two separate outcomes.
In presidentially declared disaster areas, owners of properties with casualty losses will not face loss of credits if the building isn’t placed back in service by year end.
However, owners of buildings outside these areas will lose credits for the year if their units aren’t repaired by December 31. A unit in compliance on December 31 and eligible for the credits, or it’s not. As RealPage’s Proctor puts it, “Imagine an owner with a unit that has been in compliance all year. Then the unit is damaged in a ﬁre in December. The owner either restores it by December 31 or they are not eligible to take credits for the entire year.”
Affordable Housing Compliance Services
There are ways to tackle this problem.
The first is simple. Ensure your units are always in safe, presentable and sanitary condition. Keep your certiﬁcations up to date. Be sure all households are qualiﬁed. Finally, follow all requirements in Section 42.
The second approach is focused on the long term. Work with housing industry associations to petition the IRS to treat all casualty events equally. You will find plenty of support from your peers.
Proctor opens a third possibility.
“Hire an expert,” he says. “RealPage Compliance Services has a proven track record. Our dedicated teams of compliance experts are at your service to help mitigate risk, maximize occupancy and ensure property compliance with federal, state and local government regulations. You can supplement your staff with our team to help keep certifications up to date, prevent loss of credits and simplify compliance overall. With millions of dollars potentially at stake, I can tell you confidently that it’s worth it.”