Acquisition Rehab When Old Becomes New

Acquisition rehab tax credit projects are on the rise, and it is especially important to know when existing households need to be certified for the owner to begin claiming tax credits.

While the claiming of the tax credits in an acquisition rehab property is most sensitive to the year the rehab is placed in service, the qualifying of a household for the tax credits is based on the acquisition date.

For new construction projects, the tenant households are certified before they move in. The effective date of the move-in becomes the effective date on the Tenant Income Certification (TIC). All the verifications in the file should be dated within 120 days in advance of the effective date of the move-in.

However, in an acquisition rehab scenario, the tenant households may already be in place and need to qualify at acquisition. The IRS recognizes that it may take time for the new owner to prove the existing tenant households qualify and therefore allows the new owner 120 days after acquisition to prove these households qualify. Refer to 2024 IRS 8823 Guide Chapter IV Section J. Income Certifications Where Owner Acquires or Rehabilitates Existing Building.

This means the IRS allows existing tenant households certified 120 days before or 120 days after acquisition to have an effective date on the TIC as of the Acquisition Placed in Service Date (date the property was purchased). Therefore, the effective date on the TIC may predate the date the paperwork is completed and signed by up to 120 days and will remain in compliance. The income limits used will be those in effect as of the date of acquisition. The move-in date reflected on the acquisition TIC should remain the original date the existing tenant household moved into the property.

For an existing household who signs the TIC after the 120 days from the date of acquisition, their Tenant Income Certification will have an effective date as of the date the last adult household member signs.

New move-ins that take place after the acquisition date will need to qualify and have an effective date as of the move-in date, as typically seen with any move-in at a Low-Income Tax Credit (LIHTC) property. In this instance, the move-in date and effective date on the TIC would reflect the same date.

If the rehab is completed the year following acquisition, the units occupied by qualified existing tenant households at acquisition may begin to produce a tax credit in January of the year the owner completes the rehab activities.

The IRS created a “safe harbor” test to allow owners to use existing tenant households as tax credit qualifying households in an event where the households were income eligible at acquisition but went over the income limit during the rehab construction period before credits were initiated.

This “safe harbor” test must be completed within 120 days before the beginning of the first year of the credit period. The “safe harbor” test consists of confirming with the household that sources and amounts of anticipated income included on the acquisition TIC are still the same. If additional sources or amounts of income are identified, the TIC will be updated based on documents provided from the household, and it is not necessary to complete third-party verifications. If the household is found to now be over-income based on the current income limits, the Next Available Unit Rule is applied.

If the effective date of the acquisition TIC is 120 days or less before January 1^st, the “safe harbor” test is not necessary.

Example: Owner purchased an existing building October 1, 2024, and anticipated beginning the tax credit period January 1, 2025. A household in the acquired building is determined to be income qualified on October 22, 2024. Because the household was determined to be income-qualified within the 120 days of January 1, 2025, it is not necessary for the Owner to complete the “safe harbor” test.

If the effective date of the acquisition TIC is more than 120 days before the first year of the tax credit period, the “safe harbor” test is necessary.

Example: Owner purchases the building on March 1, 2024, and anticipated beginning the tax credit period January 1, 2025. The household was determined to be income qualified on April 1, 2024. Because the effective date of the acquisition TIC is more than 120 days before the beginning of credit period on January 1, 2025, the household’s income must be “safe harbor” tested no earlier than 120 days before January 1, 2025 (test should occur between September 3-December 31, 2024) to determine whether Next Available Unit Rule should be applied.

Some important additional thoughts on the “safe harbor” test:

1. The “safe harbor” protects income only; therefore, the household must remain student eligible throughout their tenancy to be considered LIHTC qualified.
2. The unit must be kept rent restricted to receive the safe harbor protection.

Often projects that undergo acquisition/rehab are existing LIHTC properties. When an existing LIHTC project receives a subsequent allocation of credits, this is known as “resyndication.” This can only happen after the project completes the initial 15-year compliance period. For example, a property cannot receive an allocation of credit in 2020 and then again in 2026.

With resyndication there is a concept known as “Income Grandfathering.” A project may have a unit occupied by a household that on the effective date of the acquisition for the second allocation of credits that is over the current income limit. If the household was previously income qualified when they initially occupied the unit during the initial allocation of credits, they may be used as a qualified household for this new round of credits. The over income household would be “grandfathered in” and only allowed under resyndication.

It is critical that the initial move-in file for the over income household that is “grandfathered in” is intact and well documented. Some states will allow an annual recertification file to be used if the initial move-in file cannot be used (NOTE: the recert must include full third-party income verification).

Although resyndication allows previously income qualified households to be “grandfathered in” and qualify the unit for the subsequent allocation of credits, there is no such protection offered to full-time student households or to units charged gross rent that exceeds the applicable limitation.

If the project undergoing the acquisition/rehab is not a subsequent allocation of credits and the existing tenant has too much income to qualify, the owner will need to negotiate an incentive with the over income household to voluntarily leave the apartment (so it can be re-rented to a qualified household and credits can then be claimed). Make sure the over income household chooses to leave in a voluntary manner and note that some households may simply choose not to leave despite the owner’s best efforts. It is especially important to note an owner may not evict or not renew leases without good cause. In instances where the over income household remains, the unit is treated as a non-qualified unit.

Creating and maintaining affordable housing communities is a complex task. Numerous state and federal requirements must be followed – both during development and for years thereafter. We clarify LIHTC, Federal HOME, HUD, and certification requirements you must follow to remain compliant. For more information regarding services MLCM offers, be sure to visit our website and don’t hesitate to contact us.

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