Questions Posed...

In Revenue Ruling 2004-82, the IRS answered two questions about LIHTC properties funded with the HOME Investment Partnership Act (HOME Funds). The question was how these properties could maintain a 9% applicable credit percentage while being funded with HOME Funds. HOME Funds, along with NAHASDA, HUD PBRA, Rural Development, and other below-market-rate government financing, were considered "federally subsidized" under old LIHTC rules and generally were only eligible for 4% credits. However, for HOME and NAHASDA 9% credits were possible if an owner rented at least 40% of the units in each building to households at or below 50% income limits (but not necessarily 50% rent limits). This was called the 40-50 rule. The 40-50 rule was applied by the state LIHTC agency on the form 8609 line 6(f) for a building. For properties allocated credits after 2008, the answers to questions 6 and 7 in Rev. Rul. 2004-82 relating to maintaining the 40-50 rule for HOME are now outdated. However, why this is the case is still interesting.    

...and the IRS Said...

HOME Funded properties are eligible for 9% credits for allocations after July 2008. With the Housing and Economic Recovery Act of 2008 (HERA), the definition of "federally subsidized" was revised to include only tax credit properties that were also tax-exempt bond funded under §142. For credits allocated after that, all non-bond properties qualify for the 9% applicable credit percentage, including HOME. The 40-50 concept was subsequently removed from §42 and the 8609 form. The 15-year compliance period for the latest properties that would have been subject to the 40-50 rule likely ended in 2022, so the 40-50 rule no longer applies to any project in any way that will affect federal tax credit compliance. LIHTC professionals who have joined the industry since 2008 may not have heard of the 40-50 rule, but they may encounter it on old 8609s and/or regulatory agreements. Understanding the context of Revenue Ruling 2004-82 will help them understand this historical issue and why two of the questions and answers in the Ruling are now disregarded.  

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