IRS Clarifies Eligibility of Buildings Financed with Bonds Issued Pre-2021 for 4% LIHTC Minimum Rate
- Revenue Ruling 2021-20 addresses three situations involving buildings with pre-2021 LIHTC allocations or financed by a pre-2021 tax-exempt bond issue and placed in service after December 31, 2020, in which the 4% minimum rate will not apply.
- Revenue Procedure 2021-43 establishes the de minimis amount of tax-exempt bonds and LIHTC allocation applicable to the Ruling.
The Bottom Line
Section 42 of the Internal Revenue Code of 1986, as amended (Code) provides a tax credit for qualified low-income residential rental buildings, the Low Income Housing Tax Credit (LIHTC), which is calculated based on the applicable percentage of the qualified basis of each building. The Consolidated Appropriations Act of 2021 (the Act) established a minimum applicable percentage of 4% (4% minimum rate) under Section 42(b)(3) of the Code, for buildings financed with qualified tax-exempt bonds and placed in service after December 31, 2020, subject to certain conditions, and for buildings that received a LIHTC allocation after December 31, 2020. On December 1, 2021, the IRS released Revenue Ruling 2021-20 (Ruling) and Revenue Procedure 2021-43 to address uncertainty about whether the 4% Minimum Rate applies to buildings financed by tax-exempt bonds issued, or subject to LIHTCs allocated, on or prior to December 31, 2020, and placed in service after such date.
Revenue Procedure 2021-43 establishes the de minimis amount of tax-exempt bonds and LIHTC allocation applicable to the ruling: A post-2020 issue of qualified tax-exempt bonds is not de minimis if the aggregate amount of all post-2020 obligations is equal to at least 10% of all qualified tax-exempt bonds that financed the building. A post-2020 LIHTC allocation is not de minimis if it is equal to at least 10% of the total allocations to the building that have been made on or before the date of the allocation in question.
The Ruling addresses three situations involving buildings placed in service after December 31, 2020, in which the 4% minimum rate will not apply:
- Issues of draw-down bonds issued in 2020. The 4% minimum rate is not available for a building financed by multiple draws under an issue with an issue date prior to 2021.
- Post-2020 issuance of a de minimis amount of qualified tax-exempt bonds. The 4% Minimum Rate is not available to a building financed in part with proceeds of an issue of bonds issued in 2020 and in part with proceeds of a different issue of bonds issued in a de minimis amount after December 31, 2020.
- Allocation of de minimis LIHTC amount after 2020. Where a housing credit agency enters into a binding agreement with the taxpayer in 2020 under which the agency makes a LIHTC allocation related to the acquisition and substantial rehabilitation of an existing building, and after 2020 but before the building is placed in service, the agency makes an additional de minimis LIHTC allocation related to the acquisition of the existing building, the 4% Minimum Rate is not available to that building.
Please contact one of the authors if you would like to discuss the application of this guidance to your project.
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