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LIHTC Physical Issue Correction Periods

Clarification on rules regarding LIHTC recapture and penalties

Last week in the IRS's LIHTC Newsletter, there was a reminder about non-compliance correction periods, and as a result, we received a number of questions about how this could impact our clients. The newsletter (LIHTC Newsletter # 55) clarified that while many Housing Finance Authorities provide a period of time for repairs to be completed after a physical inspection, that this period is not exempt from recapture or other tax consequences.

When your low income housing tax credit property receives it's tri-annual physical inspection, the HFA is required to submit an 8823 for all noted physical non-compliance (as well as rent and issues with the low income certifications) observed during the inspection. Before the submission of the 8823, the property is provided with an opportunity to complete the repairs; the correction period cannot exceed 90 days from the date of the notice provided to the property. In certain circumstances, an agency may extend the correction period to a total of six months, if warranted. However, it is important to remember that any correction period is not a "grace-period" that allows the property to escape recapture or other consequences.

It is also important to remember that unlike REAC Inspections, LIHTC inspections using the UPCS Inspection Code or Local Code are supposed to take into consideration the entire period of non-compliance from the date of the original event that created the damage. In Chapter 6 of the 8823 Audit Guide, an example is provided where pipes in a laundry room burst during winter. The pipes are quickly repaired and restored to working condition, but the water damaged walls are not remediated. The owner/manager requests an extension to complete the repairs and are granted additional time, but this extension of time does not mitigate the tax consequences. For this example, the date of non-compliance would be the date the pipes burst, not the date of the inspection, regardless of an extension.

For owners, managers, and investors of LIHTC properties it is important to remember that all instances of non-compliance should be addressed as quickly as possible and all portions of the building need to remain in full compliance at all times. The most common occurrence we see as consultants and inspectors is that repairs are not seen all the way through; leaks are repaired, but the walls are not cleaned; roof drains are unclogged but the stains on the roof are not removed; walls inside units or common areas are repaired, but not painted. Quite simply - it's important to see every job all the way through to the end to avoid non-compliance consequences.

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