Question Posed...

Section 42 provides for the early termination of an LIHTC extended use agreement under limited circumstances, such as for a foreclosure or when a project goes through the qualified contract process. After such an early termination of an extended use agreement, an owner is not permitted for 3 years to (I) evict or terminate tenancy (other than for good cause) of an existing tenant of any low-income unit, or (II) any increase in the gross rent of a low-income unit not otherwise permitted under §42. [§42(h)(6)(E)] Later, Congress added a provision that referred to these provisions that related to extended use provisions in general, [§42(h)(6)(B)(I)] This led a state agency to ask if the extended low-income housing commitment must only prohibit the eviction and rent actions described for the 3 years after the early termination of the extended use agreement or if they applied more broadly for the entire 30+ years of the extended use agreement.

...and the IRS Says...

Hold on...this gets a bit deep, but it is interesting! 

The prohibition is for the full extended use period and not just for the 3 years after the early termination of an extended use agreement. The IRS found that when Congress amended §42(h)(6)(B)(i) to add protection language, §42(h)(6)(E)(ii) that it referred to was already part of §42. As a result, the IRS determined that Congress must have intended the amendment to §42(h)(6)(B)(i) to add a requirement to expand what was contained in §42(h)(6)(E)(ii), which already prohibited the eviction and rent increase actions described in that section for the 3 years following the termination of the extended use period. Because the requirements of §42(h)(6)(B)(i) otherwise apply for the extended use period, the IRS said that Congress must have intended the addition of the prohibition against the actions described in subclauses (I) and (II) of §42(h)(6)(E)(ii) to apply throughout the extended use period. The guidance also clarified the enforcement provisions of the new rule. By the end of any taxable year, if it is determined that an extended low-income housing commitment for a building does not meet the requirements for an extended low-income housing commitment under §42(h)(6)(B) (for example, it does not provide no-cause eviction protection for the tenants of low-income units throughout the extended use period), the low-income housing credit is not allowable for the building for the taxable year or any prior taxable year. However, there is relief if the failure to have a valid extended low-income housing commitment in effect is corrected within 1 year from the date of the determination that the agreement is insufficient. When that is the case the credits will be allowable for the current year and any prior year.

Hisorical Note: after Revenue Ruling 2004-82 that clarified this issue, each housing credit agency was required to review its extended low-income housing commitments for compliance with the interpretation of §42(h)(6)(B)(i) provided in the Revenue Ruling. This review was required to be completed by the end of 2004. If during that review period, the housing credit agency determined that an extended low-income housing commitment is not in compliance with the interpretation of §42(h)(6)(B)(i) provided in the Ruling, one year was given to resolve the issue and avoid disallowance of all credits.  

Up Next: HOME and 4% Tax Credit Issues, Updated and Explained for a Modern Reader!

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