IRS Provides Long-Awaited Guidance on Determining Income Limits under the Average Income Test
On January 30, 2020, the IRS published Rev. Rul. 2020-4. This revenue ruling provided long-awaited guidance on how to compute the new income limits (20%, 30%, 40%, 70%, and 80%) under the average income minimum set-aside election. The addition of the new Average Income Set-Aside in 2018 was exciting news for our industry as it enables LIHTC housing providers to provide affordable housing to a previously underserved population of households — those earning up to 80% AMI who still desperately needed affordable housing. One challenge faced by owners who made this election and Housing Finance Agencies who are monitoring compliance with this set-aside is how to determine the new income limits under the set-aside. The lack of guidance on this topic made many owners leery of making this new election.
Thankfully, Rev. Rul. 2020-04 provides clear guidance on how to calculate income and rent limits. Prior to the creation of the average income set-aside in 2018, only two federal income limits were applicable to the LIHTC program; 50% and 60% of area median income. Rev. Rul. 89-24, published in 1989, provided guidance that the calculation of the 60% limit would be determined using HUD’s very-low (50%) limit and multiplying it by a conversion factor of 1.2, which represents 120% of the HUD very-low (50%) limit for the same family size.
Calculating New Income Limitations with the Average Income Test
Consistent with Rev. Rul 89-24, Rev. Rul. 2020-04, provides that the new income limits should be calculated based on the HUD very-low (50%) income limit for the same family size. For the average income test, the income limitations must be calculated as follows:
- 20% limit: 40% of the income limit for a very low-income family of the same size.
- 30% limit: 60% of the income limit for a very low-income family of the same size.
- 40% limit: 80% of the income limit for a very low-income family of the same size.
- 50% limit: equal to the income limit for a very low-income family of the same size.
- 60% limit: 120% of the income limit for a very low-income family of the same size.
- 70% limit: 140% of the income limit for a very low-income family of the same size.
- 80% limit: 160% of the income limit for a very low-income family of the same size.
The new limits can be determined by multiplying HUD’s published very-low (50%) income limit by the applicable conversion factor. HUD’s very-low (50%) income limit for a 1-person household in Denver County, Colorado is $32,500.
- 20% limit for a 1-person household = $13,000($32,500 x .04)
- 30% limit for a 1-person household = $19,500($32,500 x .06)
- 40% limit for a 1-person household = $26,000($32,500 x .08)
- 70% limit for a 1-person household = $45,500($32,500 x .1.4)
- 80% limit for a 1-person household = $52,000($32,500 x .1.6)
