A Not-So-Casual Look at Casualty Loss - Part 4
Assisting Victims of Major Disasters
Part 1: Definition of casualty loss and where we find IRS guidance
Part 2: Casualty loss related to a presidentially declared major disaster
Part 3: Casualty losses that do not relate to a declared disaster
Part 4: IRS provisions designed to assist victims of major disasters
“On the nightly news, I see the terrible plight of people whose housing was destroyed after the recent series of major disasters. Can we help these people?”
As we have seen in this series, the topic of casualty loss is closely aligned with major disasters. For this reason, IRS guidance on casualty loss also discusses ways that owners of any tax credit properties in the country may be able to assist persons displaced by such declared disasters.
Who can be helped?
States are allowed, but not required, to establish a policy to assist displaced persons by housing them in tax credit units regardless of whether they meet tax credit income limits. A displaced individual is a person who is displaced from his or her principal residence because of a major disaster and whose principal residence was located in a major disaster area designated by FEMA. If a displaced individual seeks housing at the property, the owner can house them, even if they do not qualify under the tax credit income limits or their eligibility cannot be verified. Important points are below:
The state agency must provide written approval to the owner for use of the property to house displaced individuals and specify the date on which a temporary housing period for the property will end. The temporary housing period cannot exceed 12 months from the end of the month in which the President declared the major disaster, but a state can pick an earlier date.
Existing tax credit tenants may not be evicted solely to provide emergency housing relief for displaced individuals.
Gross rents for the tax credit units used to house displaced individuals cannot exceed the maximum tax credit rents.
For each displaced individual, the owners must get the following items in a statement signed by the displaced individual under penalties of perjury:
The name of the displaced individual.
The address of the principal residence at the time of the major disaster of the displaced individual.
The displaced individual’s social security number.
A statement that he or she was displaced from his or her principal residence because of a major disaster and that his or her principal residence was located in a city, county, or other local jurisdiction that is covered by the President’s declaration of a major disaster and that is designated as eligible for Individual assistance by FEMA because of the major disaster.
In verifying household eligibility, extensive third-party verification is usually required. However, in this case the IRS proposes that self-certification is sufficient, thus eliminating unnecessary barriers to persons who may have difficulty locating paperwork after a disaster. States tax credit agencies will generally provide a form that they want used to gather this information in a format acceptable to the agency.
Temporary Housing Period
The President declared Hurricane Skitch a disaster on September 18 of this year. A state agency elsewhere in the country wishes to implement a policy to allow owners to assist displaced individuals. They select a temporary housing period that will end on September 1 of the following year. This is acceptable as it is not later than one year after the declaration.
How does the relief provision work?
Tax credit units used to house otherwise ineligible households who are displaced are not considered for purposes of two important section 42 provisions: 1) the requirement that tax credit households be nontransient, and 2) the Available Unit Rule (AUR). Leases for the displaced households can be less than the usual minimum of six months. This may be helpful, as relief housing may only be needed for a few months. As for the AUR, if there are households in a building that were over-income (over the 140% MTSP limit) at their most recent recertification in a project that is not 100% tax credit, moving in displaced non-tax credit household is not a violation of the AUR. This Rule would normally require one or more subsequent move-ins into units that are the same size or smaller than the over- income units to be rented to tax credit households only.
If a displaced individual begins occupancy of a unit during the temporary housing period but after the first year of the credit period, then the unit retains the status it had immediately before they moved in ("empty", "tax credit" or "market"), and the unit remains as such while occupied by a displaced individual during the temporary housing period, regardless of the income of the displaced individual. The income of the displaced individual occupying the unit thus does not affect the building's applicable fraction or the MSA.
The impact on first year tax credits
Can properties in the first year of their credit period house displaced persons? The answer is yes. If a displaced individual begins occupancy of a unit at a time that is within both the temporary housing period and the first year of the credit period, then during the temporary housing period, while occupied by the displaced individual, the unit is treated as a low-income unit for determining buildings’ qualified basis and the project's minimum set aside (MSA).
What happens after the end of the temporary housing period? If a displaced individual begins occupancy of a unit during the temporary housing period and vacates the unit before the end of the temporary housing period, that unit retains the status prior to the displaced person occupying the unit, until it is occupied by the next tenant, even if the next tenant takes occupancy after the end of the temporary housing period. If the unit was empty (never qualified for tax credits) during the first year, and is intended to be a tax credit unit, it will be very important to get a qualified household in the unit as soon as possible after the end of the temporary housing and correction period. That way, the unit will be tax credit for purposes of calculating both the MSA and qualified basis by the end of the following tax year. If the next tenant is not a displaced individual or begins occupancy after the end of the temporary housing period, the status of the unit is determined per normal tax credit rules.
Jenny and Carol had their home destroyed in Hurricane Skitch in September. With only the clothes on their back, they travel to a state in the northern United States where relatives live. The state agency has allowed a temporary housing period that will end on September 1 of the following year. Jenny and Carol provide self-certification of their displaced status and move into a vacant tax credit unit on September 29. Both Jenny and Carol work with internet-based businesses, but their income is not verified, and there no impact on the tax credits. The lease that the owners establish ends on August 31 of the following year.
If a displaced individual continues to occupy a unit in the project at the end of the temporary housing period, the household’s income status must be determined as though the household moved in on the day immediately following the end of the temporary housing period. For example, a unit is a market-rate unit beginning immediately after the end of the temporary housing period if the displaced individual was not tax credit qualified when they moved in and their income then exceeds the applicable income limit. If the project fails to comply with the minimum set aside requirement solely because a displaced household continues to live in a unit after the temporary housing period, a 60-day period is allowed for correction.
The emergency housing of displaced individuals in low-income units during the temporary housing period (and, if applicable, the 60-day correction period) does not cause the building to suffer a reduction in qualified basis (which would cause the recapture of low-income housing credits).
Displaced Household After Temporary Period
Jenny and Carol are still in the tax credit unit toward the end of their lease in July, almost a year after Hurricane Skitch. Preparing for the end of the temporary housing period, the owner wisely verifies the household’s income. They are then over the tax credit income limit. The owner serves notice that they will not renew the lease when it expires. The household moves out and returns to their original home by September 1. The unit that Jenny and Carol was in retains the vacant tax credit status it had before the displaced household moved in.
Note: if the household had not moved out until September 30, the unit would still have reverted to its original vacant tax credit status, as the over-income household moved out prior to the end of 60-day correction period that started with the end of the temporary housing period on September 1. If the owner has waited to verify income until September 1, the termination of occupancy could still have been accomplished by the end of the 60-day correction period. If the household had not been moved by the end of the 60 days, the unit would not have counted as tax credit starting September 1.
Question: My state has encouraged housing displaced individuals after the most recent disaster. What records do we need to keep?
Answer: Besides the certification from the displaced individuals mentioned above, the owner must maintain a record of the state agency’s approval of the property’s use for displaced individuals and the approved temporary housing period. The owner must also report to the state agency at the end of the temporary housing period a list of the names of the displaced individuals and the dates the displaced individuals began occupancy. The owner must also provide any dates displaced individuals ceased occupancy and, if applicable, the date each unit occupied by a displaced individual becomes occupied by a subsequent tenant.