Aspire to Average! - Part 2

How Does Income Averaging Work?

On March 23, 2018, an omnibus spending bill, the Consolidated Appropriations Act of 2018, contained provisions that made significant changes to the Housing Tax Credit program. One of these provisions is a new minimum set-aside, which the law refers to as the Average Income Test. This series of articles discusses common questions about this option, what we know about it, and questions that are still unanswered.

Series Outline

Part 1. Which Projects Can Use Averaging and When?

Part 2. How Does Income Averaging Work?

Part 3. Benefits & Challenges Income Averaging Presents

Part 4. The Available Unit Rule & Conclusion

This second article will describe how income averaging works. As noted above, the new provision allows for two additional minimum set-aside (MSA) elections. Specifically these are 40-60 (average) and 25-60 (average) for New York City. Prior to 2018, the minimum set-aside options for most of the country were 20-50 or 40-60. Additionally, 25-60 is a special set-aside for New York City only. These set-asides represent a fundamental election for tax credit compliance purposes. The first number establishes the minimum percentage of units that must be maintained as tax credit to claim any tax credits for the project (20% or 40%). The second number is then the highest possible federal income and rent limit for any unit at the project that will be claimed as a tax credit unit (50% or 60% MTSP). These are elected by the owner when they file tax credits for the first time and submit form 8609 to the IRS. Update: This form was amended on May 31, 2018, to include the new option. Our announcement can be found HERE. The MSA is elected on line 10(c) of the 8609. The below infographic provides some additional details.

The first part of the new MSA options work the same way as they have in the past; they indicate the minimum obligation of tax credits units that must be maintained in order to retain the right to claim any tax credits for a project. The second part, however, indicates the average income and rent limit set-asides that must be maintained among the tax credit units at the project.


What is the highest income now allowed at a tax credit project that elects the average income test?

Answer: The average MSAs allows for tax credit units set-aside for income and rent limits up to 80% MTSP. In order to maintain an average of 60%, however, every 80% unit must be balanced with units at set asides less than 60%. See a very simple example below. Notice that of the twenty units, one is at 80% MTSP limits, but one unit must be at or below 40% MTSP, resulting in an average of 60%.

​​ #5

Are actual household incomes averaged? I’ve heard that, if I have a household at 68% of area income, I will need to rent to a 52% household to average 60%. Is this true?

Answer: No, designated set-asides are averaged, not individual household incomes. As long as a household is at or below the set-aside designation for the unit, it can support tax credits. The 68% household at move-in will qualify for a 70% (or a 80%) unit. Then, in a simple example, a 50 or 40% unit will need to exist at the property to average at 60%.


What about units set-aside at percentages other than 10% increments? For instance, my state agency requires 45% MTSP units. Could I balance these with 75% units?

Answer: No. The law limits the set-aside options to increments of 10% - from 20% to 80%. For example, a state-designated 45% units would qualify for the federal set-asides of 50%, and could be balanced federally with a 70% unit. Note: that is why the answer for the above questions said that a 68% income household qualifies for a 70 or 80% unit.


Will it always be a one-to-one unit average? For instance, for the above example of an 80% unit, is one unit at 40% the only option?

Answer: No. The key is that an overall average of 60% or less is maintained using some or all of the the seven allowed set-asides. For instance, the below alternative would also work.

Upon reflection, it is clear that there are many, many possibilities, depending on the number of units and desired set-asides. All of the below would be acceptable.

  • An 80% unit with one 40% unit OR two 50% units.

  • A 20% unit with two 80% units.

  • One 80%, two 70% and three 50% units.

  • Twenty 80% units, ten 60% units, twenty-eight 50%, one 40%, two 30% and one 20% units.

A couple more configuration options are pictured graphically below.


Must the averaging be maintained on a building or project basis?

Answer: As the minimum set-aside is a project rule, the average will need to be maintained across a project. Therefore, for a multiple building project (as elected on form 8609), all units in all buildings will be averaged.


How does the square footage of the units affect the average minimum set-aside?

Answer: Unlike the applicable fraction, the minimum set-aside calculation does not involve unit size. One unit is one unit out of the total units, regardless of size, for purposes of the MSA.


Are the 80% and 30% tax credit limits the same as HUD's extremely-low and low-income limits?

Answer: No. IRS guidance in Rev. Rul. 89-24 provided that tax credit limits are calculated from the HUD 50% very-low limits. 60% limits were calculated multiplying the 50% limit by a factor of 1.2. Since that time, HUD began calculating and publishing the 60% limits using the IRS guidance, and the methodology went into disuse among program users. Until such time as HUD publishes the new tax credit set-asides, we will need to return to calculating the new limits. Consistent with the old formula, the 30%, 70% and 80% limits would be calculated using factors of .6, 1.4 and 1.6, respectively. Although commonly called 80% and 30% limits, HUD's extremely-low and low limits are calculated using other adjustments, such as rounding and the federal poverty level.


My state agency already requires many of the set-asides the new law allows for. Can I use my state set-asides for federal purposes?

Answer: It depends how your state has chosen to calculate their limits. Until March of 2018, there were only 50% and 60% limits from a federal perspective. States determined how they calculate the limits used for other set-asides they require. Some use adjustment factors similar to those mentioned in the last answer, based on Rev. Rul. 89-24. Others use the HUD extremely-low limits for 30% limits. Now, however, the set-asides used for the minimum set-aside will need to follow the federal methodology. States with differing methods will have to decide if they will continue to use their own methods or reconcile with the federal method.

Next article: Why would we want to use the income averaging provision? Will we be able to charge higher rents now? This and other challenges and still unanswered questions to discuss...

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