IRS Hosts Public Hearing on Average Income Set-Aside

Regulation | March 24, 2021 | by Juliana Bilowich

In a public hearing hosted by the Internal Revenue Service, housing stakeholders pushed for a reversal of IRS guidance on the Average Income Test for Housing Credit properties.

On March 24, the Internal Revenue Service (IRS) held a public hearing on proposed regulations related to the Average Income Test for Low-Income Housing Tax Credit (LIHTC) properties.

The teleconference hearing, titled “Section 42, Low-Income Housing Credit Average Income Test Regulations,” was announced in response to industry pressure after the IRS released proposed rulemaking in October 2020 on the new Average Income Test. During the March 24 hearing, key federal agency staff from the IRS and the Department of the Treasury heard testimony and asked questions of affordable housing stakeholders who could register in advance to participate.

The Average Income Test (AIT) was enacted in 2018 as the third minimum set-aside option for LIHTC properties as a way to reach lower income households; it requires that at least 40 percent of the units in the project to be rent-restricted and designated low-income units, and the average unit designation to be no more than 60 percent of Area Median Income (AMI).

LeadingAge members were strong supporters of the AIT but needed more clarity for implementation. Rather than providing clarity, the IRS’s October proposed rulemaking included a number of concerning restrictions. In December, LeadingAge submitted comments to the IRS recommending alternate approaches for AIT implementation.

Throughout the teleconference hearing, witness testimony focused on three issues featured in LeadingAge’s December comments to the IRS:

  • Permanently Fixed vs. Floating Unit Designations;
  • Unit vs. Property Non-Compliance of the Minimum Set-Aside; and
  • Time Periods for Mitigating Actions

Specifically, witnesses discussed the need for flexibility with unit designation. The proposed rulemaking requires designations to be permanently fixed, but LeadingAge and other housing stakeholders have called for various types of unit designation modifications, such as for waitlist management and for cases where a mitigating action is necessary to correct property non-compliance with the set-aside. Modifications should also be allowed as floating designations in which the overall property average does not change, or designations that change the average of the property but do not bring the property out of compliance with the minimum set-aside.

LeadingAge will continue to work with the IRS to ensure that the new Average Income set-aside remains a viable option for reaching more older adults with low and extremely low incomes.