IRS Rules on Applicability of 4 Percent Floor for LIHTC Purposes

IRS Rules on Applicability of 4 Percent Floor for LIHTC Purposes

Internal Revenue Service

The IRS has provided guidance (Rev. Rul. 2021-20) regarding whether the 4 percent applicable percentage (4 percent floor) under <a href="/research/federal/usc26/42#cptc-0000022" resolve="/lr/resolve//cptc#cptc-0000022">section 42(b)(3)</a> applies to the low-income buildings described in three scenarios. <a href="/research/federal/usc26/42#cptc-0000002" resolve="/lr/resolve//cptc#cptc-0000002">Section 42(a)</a> provides that the amount of the low-income housing tax credit (LIHTC) for any tax year in the credit period is an amount equal to the applicable percentage of the qualified basis of each qualified low-income building. <a href="/research/federal/usc26/42#cptc-0000006" resolve="/lr/resolve//cptc#cptc-0000006">Section 42(b)(1)</a> provides rules to determine the applicable percentage. Section 42(b)(2) sets a minimum credit rate of 9 percent for new buildings that are not federally subsidized.  <a href="/research/federal/usc26/42#cptc-0000022" resolve="/lr/resolve//cptc#cptc-0000022">Section 42(b)(3)</a> was added by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 to provide a 4 percent minimum credit rate for buildings to which the 9 percent floor does not apply and that are placed in service by the taxpayer after December 31, 2020. According to the act, the new provision is effective for (1) any building that receives an allocation of housing credit dollar amount after December 31, 2020, and (2) any building that is financed at least in part with an obligation described in <a href="/research/federal/usc26/42#cptc-0000270" resolve="/lr/resolve//cptc#cptc-0000270">section 42(h)(4)(A)</a> if the obligation is issued after December 31, 2020. The first scenario presented by Rev. Rul. 2021-20 involves a draw-down loan with an issue date in 2020 and a state agency with authority to issue exempt facility bonds to support qualified residential rental projects within the meaning of <a href="/research/federal/usc26/142#cnsj-0000036" resolve="/lr/resolve//cnsj#cnsj-0000036">section 142(d)</a>. The taxpayer is a conduit borrower that entered into an agreement with the state agency under which the agency will provide exempt facility bond financing to the taxpayer to construct a new building for a qualified residential rental project. The facts are the same in the second scenario, except that instead of borrowing under a draw-down loan, the agency issued a de minimis amount of exempt facility bonds in 2020 to finance the conduit borrower’s construction of the new building for the qualified residential rental project. In the third scenario, the agency and the taxpayer entered into an agreement to allocate to the conduit borrower a housing credit dollar amount for the acquisition of an existing building and an additional housing credit dollar amount for the rehabilitation of the building into a qualified low-income building. In determining whether the 4 percent floor applies, all the buildings described in the revenue ruling satisfy the requirement of <a href="/research/federal/usc26/42#cptc-0000022" resolve="/lr/resolve//cptc#cptc-0000022">section 42(b)(3)</a> that a building be placed in service after 2020. Each of the three situations, however, raises the question whether the post-2020 events in that scenario meet the relevant portions of the effective date provisions of the act, which require a post-2020 issuance of a tax-exempt obligation or a post-2020 allocation of housing credit dollar amount. Rev. Rul. 2021-20 concludes that a draw-down bond that is issued before 2021 (with draws occurring in a later year); a de minimis <a href="/research/federal/usc26/42#cptc-0000270" resolve="/lr/resolve//cptc#cptc-0000270">section 42(h)(4)(A)</a> obligation issued after December 31, 2020; or a de minimis allocation of low-income housing credit dollar amount occurring after December 31, 2020, do not cause a building to be subject to the minimum 4 percent floor under <a href="/research/federal/usc26/42#cptc-0000022" resolve="/lr/resolve//cptc#cptc-0000022">section 42(b)(3)</a>.

Related IRS <a href="/lr/resolve//7cnbg">revenue procedure</a>.

The IRS has provided guidance (Rev. Rul. 2021-20) regarding whether the 4 percent applicable percentage (4 percent floor) under section 42(b)(3) applies to the low-income buildings described in three scenarios.

The IRS has provided guidance (Rev. Rul. 2021-20) regarding whether the 4 percent applicable percentage (4 percent floor) under section 42(b)(3) applies to the low-income buildings described in three scenarios. Section 42(a) provides that the amount of the low-income housing tax credit (LIHTC) for any tax year in the credit period is an amount equal to the applicable percentage of the qualified basis of each qualified low-income building. Section 42(b)(1) provides rules to determine the applicable percentage. Section 42(b)(2) sets a minimum credit rate of 9 percent for new buildings that are not federally subsidized.  Section 42(b)(3) was added by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 to provide a 4 percent minimum credit rate for buildings to which the 9 percent floor does not apply and that are placed in service by the taxpayer after December 31, 2020. According to the act, the new provision is effective for (1) any building that receives an allocation of housing credit dollar amount after December 31, 2020, and (2) any building that is financed at least in part with an obligation described in section 42(h)(4)(A) if the obligation is issued after December 31, 2020. The first scenario presented by Rev. Rul. 2021-20 involves a draw-down loan with an issue date in 2020 and a state agency with authority to issue exempt facility bonds to support qualified residential rental projects within the meaning of section 142(d). The taxpayer is a conduit borrower that entered into an agreement with the state agency under which the agency will provide exempt facility bond financing to the taxpayer to construct a new building for a qualified residential rental project. The facts are the same in the second scenario, except that instead of borrowing under a draw-down loan, the agency issued a de minimis amount of exempt facility bonds in 2020 to finance the conduit borrower’s construction of the new building for the qualified residential rental project. In the third scenario, the agency and the taxpayer entered into an agreement to allocate to the conduit borrower a housing credit dollar amount for the acquisition of an existing building and an additional housing credit dollar amount for the rehabilitation of the building into a qualified low-income building. In determining whether the 4 percent floor applies, all the buildings described in the revenue ruling satisfy the requirement of section 42(b)(3) that a building be placed in service after 2020. Each of the three situations, however, raises the question whether the post-2020 events in that scenario meet the relevant portions of the effective date provisions of the act, which require a post-2020 issuance of a tax-exempt obligation or a post-2020 allocation of housing credit dollar amount. Rev. Rul. 2021-20 concludes that a draw-down bond that is issued before 2021 (with draws occurring in a later year); a de minimis section 42(h)(4)(A) obligation issued after December 31, 2020; or a de minimis allocation of low-income housing credit dollar amount occurring after December 31, 2020, do not cause a building to be subject to the minimum 4 percent floor under section 42(b)(3).

Sec. 42 Low-income housing credit

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IRS Rules on Applicability of 4 Percent Floor for LIHTC Purposes