New Rules Proposed for Tax Credit Utility Allowances
Within a week of each other, the Internal Revenue Service and Department of Housing and Urban Development both acted favorably on NAHB recommendations for setting utility allowances in the Low-Income Housing Tax Credit (LIHTC) program.
The LIHTC program limits gross rents — including utilities, with the exception of telephone and cable TV service. In the typical case where the tenant pays some utilities, a “utility allowance” is subtracted from the net rent going to the property owner. These allowances have become problematic in some locations where they have been unrealistically high and volatile. Current IRS regulations provide few options beyond using the same allowances local Public Housing Authorities (PHAs) use for the Section 8 program, which often are based on older properties.
Over a period of years, NAHB has been working with the IRS to revise its regulations, and with HUD to provide PHAs with help in calculating utility allowances that more accurately reflect costs.
After several letters from NAHB, HUD made its new spreadsheet model for calculating utility allowances available on its Web site on June 13: (www.huduser.org/resources/utilmodel.html). The HUD model calculates different allowances, depending on when the project was built. If adopted by PHAs, it should produce lower allowances for many newer LIHTC properties.
Then, on June 18, the IRS issued new proposed regulations for LIHTC utility allowances. The IRS proposal included several changes recommended by NAHB, including:
- Allowing property owners to use the new HUD model to calculate utility allowances even if the local PHA doesn’t
- Allowing property owners to use a utility allowance estimate that the state Housing Finance Agency provides
- Not requiring changes in utility allowances while occupancy in a new project is becoming stabilized
- Allowing more flexibility in the timing of rent adjustments, so that they only need to be adjusted once a year
- Clarifying the use of allowances estimated by utility companies in cases where charges are paid to more than one company (for example, when electric power generation and transmission payments go to separate entities.) NAHB members in Texas indicated that this is particularly needed in their state.
The one major change recommended by NAHB that the IRS did not adopt in the proposed regulations is allowing LIHTC property owners and developers to use utility allowances derived from computer software models run by state-certified engineers. NAHB believes this option is needed to provide sufficient incentives to those who build highly energy-efficient LIHTC projects. The IRS specifically requested comments on this point, and NAHB will provide them in public hearings scheduled for Oct. 9.
For more information, or to provide input to NAHB comments, e-mail Carmel McGuire or call her at 800-266-8350 x8207.