Each Compliance Stoplight Test presents a real-world scenario. What color is the compliance stoplight for situation: Green Light (tax credits are safe), Yellow Light (proceed with caution), or Red Light (tax credit loss is imminent)?

Scenario
An LIHTC property is sold to a new owner. The management company is aware of the IRS guidance regarding certifications of existing families within 120 days of acquisition, but the certifications are not completed during that period. Instead, the certifications are completed eight months later, by the start of the following year.

What color is the compliance stoplight?

🟢 Green Light – Tax credits are safe
🟡 Yellow Light – Proceed with Caution
🔴 Red Light – Tax credit loss imminent

Many compliance professionals know the 120-day acquisition certification guidance in the 8823 Guide and assume missing that deadline automatically creates a Red Light compliance violation.

🟢 Green Light — Tax Credits Are Safe

Missing the 120-day acquisition certification timeframe does not create LIHTC noncompliance. The 120-day period is an IRS safe harbor for simplified first-year acquisition credit treatment, not a statutory or regulatory deadline under Section 42.

More Details

After the acquisition of an LIHTC property, the new owner must establish that occupied units qualify as low-income units under Section 42. IRS guidance allows owners to complete certifications of existing families within 120 days and treat the units as qualified for purposes of first-year acquisition credits back to the date of acquisition. Failing to meet the 120-day safe harbor does not create noncompliance. The primary risk is that eligibility may not be documented before a family’s income changes, potentially requiring replacement with an eligible family to preserve the unit’s qualified status. If the families are later verified as income-qualified, or replaced with eligible families, the units may still qualify under Section 42, but the first-year credits may be negatively impacted.

Compliance Insight

Missing the 120-day acquisition certification timeframe does not create LIHTC noncompliance. The 120-day rule is a safe harbor, not a mandatory Section 42 deadline.

Closing

Did the result surprise you? Watch for next week’s Compliance Stoplight Test.

References

• IRC §42(g)
  
• 8823 Guide (2024) IV.D