On October 12, the IRS published a final rule to implement Congress’s 2018 authorization of a third income option for low income housing tax credit communities.

Prior to 2018, tax credit developers had two income strategies to choose from: either having at least 20% of the units be both rent-restricted and occupied by households with gross incomes at or below 50% of area median gross income or at least 40% of the units in the project must be both rent-restricted and occupied by tenants whose gross income is 60% or less of AMGI.

To better help households with incomes below 50% and above 60% and for other reasons, the 2018 change added a third income strategy for developers to choose: that at least 40% of the units be occupied by tenants whose incomes average no more than 60% of area median gross income. This is the average income test.

By choosing this strategy, a housing tax credit developer can house residents in tax credit units with incomes up to 80% of AMI as well as residents with incomes well below 50% of area median, as long as the average income of housing credit assisted households does not exceed 60% of area median.

Importantly, the rents for these units must be equal to 30% of the qualifying income level for that unit – there is a cross subsidization here where the higher rents paid by the highest income tenants subsidize rents of the lowest income tenants.

Since 2018, about half the states have adopted average income policies.

Today’s final regulation is sure to bring more states to this income averaging party, which LeadingAge expects will help more rural developments be successful and will help the housing credit program better serve lower income households in general.

Income averaging might not be viable for every development. There likely has to be a housing market where households with incomes above 60% are attracted to and need income-restricted housing programs.

Where these developments will lease up and pencil out will likely be in low-poverty neighborhoods, which is great for the households who’ll live in these homes.

Read the final rule here.