IRS Final Rule on the Average Income Test: What It Means for Your Properties

A Clearer Path Forward for LIHTC Projects

The IRS has released the final rule for the Average Income Test (AIT) under the Low-Income Housing Tax Credit program. This update replaces the temporary rules issued in 2022 and brings more certainty to how properties must comply with AIT.

For property owners and managers, the news is mostly positive: the rule removes some of the harshest compliance risks and provides clearer guidance on day-to-day operations. At the same time, it introduces new documentation and reporting responsibilities that will require careful attention.

Key Takeaways for Owners and Managers

1. One Bad Unit Won’t Sink the Whole Project

Under the old rules, one unit falling out of compliance could threaten the entire property’s tax credits. The final rule fixes that. As long as a group of units still meets the 40% low-income threshold and averages no more than 60% of AMI, the project remains compliant.

2. The “Qualified Group of Units” Is Now Required

Owners must identify a specific group of units that meet the AIT requirements. This group determines whether the property qualifies. Keeping this group properly documented – and updated – is now a compliance must.

3. More Flexibility in Managing Unit Designations

The rule allows some flexibility to swap or redesignate income limits on units, such as when tenants transfer or when compliance needs to be restored. These changes must follow IRS and state agency rules, but they give owners more options to stay compliant.

4. Turnover and Vacancies Matter More

The way units are re-rented after vacancies or tenant income changes can now affect compliance. The final rule gives owners more flexibility when multiple units go over-income, but planning and documentation are essential.

5. Expanded Recordkeeping and Reporting

Owners must keep detailed records of which units are in the qualified group and how they’re designated. This information must also be reported to state housing agencies each year, following the agency’s requirements.

What This Means for Your Project

• Lower Risk, Higher Responsibility: The new rule protects properties from losing credits over one non-compliant unit, but the trade-off is more paperwork and stricter procedures.
• Closer Coordination with State Agencies: Each housing finance agency (HFA) may have different reporting requirements. Owners should expect more interaction and oversight from their state partners.
• Stronger Systems Needed: Tracking unit designations and maintaining documentation will be critical. Spreadsheets may not be enough – dedicated compliance systems or outside support may be needed.

Final Thoughts

The IRS final rule is a welcome change for the industry. It provides breathing room by eliminating the “cliff effect,” while setting clear expectations for recordkeeping and reporting. Owners and managers who stay organized and proactive will find it easier to maintain compliance under these rules.

Now is the time to review property records, confirm how your qualified groups are identified, and ensure procedures are in place for reporting changes to your state HFA. With the right systems and support, your properties can navigate the new requirements confidently and continue to maximize the benefit of LIHTC credits.

Owners and Management Agents should be well trained in understanding the rules and regulations of the affordable housing programs pertaining to their properties as they relate to maintaining compliance. MLCM offers consulting services and training regarding various affordable housing programs. For more information on these services, don’t hesitate to contact us.

The information presented in this article is intended solely for informational purposes and should not be construed as consulting advice from M&L Compliance Management LLC.

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