How to Comply with IRC Section 42(l)(1), First-Year Certification

In addition to annual certifications, owners are required to complete a “First-Year Certification” under Internal Revenue Code (IRC) Section 42(l)(1). The certification is made to identify specific information needed for the administration of the program and document specific elections that will govern how the site is operated.

The credit allocation for your site as determined by the state housing agency is documented on Form 8609, Low-Income Housing Credit Allocation and Certification. The agency executes Part I and then mails the Form 8609 to the owner. The owner then completes the certification required under IRC Section 42(l)(1) for the first year of the credit period by completing Part II of the Form 8609 and submitting it, one time, to the IRS.

We’ll go over the questions asked in Part II of Form 8609 and highlight areas to watch out for when completing the form. For your reference, we’ve provided Form 8609, Low-Income Housing Credit Allocation and Certification.

Line 7: Eligible Basis

On this line, the owner enters the eligible basis in dollars of the building. Eligible basis doesn’t include the cost of land. The amount on line 7 should reflect any increase under IRC Section 42(d)(5)(B) for being in a high-cost area such as a “qualified census tract” or “difficult development area” (Form 8609, line 3b). For new buildings, the eligible basis may be up to 130 percent of such basis determined without this provision. For existing buildings, the rehabilitation expenditures under Section 42(e) may be up to 130 percent of the expenditures determined without regard to this provision.

Generally, the amount on line 7 should equal the amount on Form 8609-A, Annual Statement for Low-Income Housing Credit, line 1, to be filed with the owner’s federal income tax return, unless Form 8609-A shows there has been a reduction in eligible basis after the end of the first year of the credit period.

Line 8a: Original Qualified Basis

Here, owners enter the qualified basis as of the end of the first year of the credit period using the applicable fraction as of the end of the first year of the credit period. To calculate, multiply the eligible basis of the building shown on line 7 by the smaller of the unit fraction or the floor space fraction as of the close of the first year of the credit period. 

Line 8b: Multi-Building Projects

If you elect to treat a building as part of a multiple building project, then a statement identifying all the buildings that are to be included in the “project” must be attached to the Form 8609. The buildings should be identified by name, address, BIN, and the amount of credit allocated to each building.

Under IRC Section 42(g)(7) and Treasury Regulation Section 1.103-8(b)(4)(ii), two or more qualified low-income buildings can be included in a project only if the buildings: (1) are located on the same tract of land (including contiguous parcels), unless all of the dwelling units in all the buildings are rent restricted; (2) are owned by the same person for federal tax purposes; (3) are financed under a common plan of financing; and (4) have similarly constructed housing units.

Identifying which buildings are included in the project is important for determining whether the project met the minimum set-aside requirement under IRC Section 42(g)(1).

Line 9a

Line 9a is an election related to federally subsidized buildings. The definition of “federally subsidized” is different, depending on when the building was placed in service before July 31, 2008, or after July 30, 2008.

You may elect to reduce the eligible basis by the proceeds of any tax-exempt obligation and claim the 70 percent present value credit on the remaining eligible basis. A minimum applicable percentage of 9 percent is in effect for new non-federally subsidized buildings placed in service after July 30, 2008, unless the housing credit agency determines a lesser amount is necessary to assure project feasibility. However, if you make this election, you may not claim the 30 percent present value credit on the portion of the basis that was financed with the tax-exempt obligation.

If neither Line 6a nor Line 6d is checked by the state agency to identify credit allocations to federally subsidized buildings, and Line 4 is zero, then you may either: (1) check neither box; or (2) check the “no” box. Either choice is acceptable.

If Line 6a or Line 6d is checked, and/or Line 4 is greater than zero (depending on when the building was placed in service), then the building is federally subsidized and you must check either “yes” or “no.”

Line 9b

Line 9b is an election applicable when two conditions are met: (1) the building has both market-rate units and low-income units; and (2) the quality standards of the market-rate units are above the average quality standards of the low-income units in the building. If both conditions are met, you must check “yes” or “no.” Otherwise, you may check “no” or not check either box; either choice is acceptable.

Line 10–Irrevocable Elections

Line 10 includes four irrevocable elections:

Line 10a is the election to begin the credit period the first year after the year the building was placed in service. Owners should make sure the choice is consistent with how they are claiming the credit on their tax return.

Line 10b is the election to not treat a large partnership (with 35 or more partners) as the owner subject to the recapture provisions under IRC Section 42(j). A partnership with 35 or more partners will be treated as the owner unless the taxpayer makes an affirmative election by checking the “yes” box. For partnerships with fewer than 35 partners, don’t check the “yes” box.

Line 10c is the minimum set-aside election, either 20-50 or 40-60. For New York City only, there is a 25-60 option. The most common misunderstanding is that the elected income limit applies to all the low-income units, not just the minimum number of units. For example, if you own a 100 percent low-income building and elect the 20-50 minimum set-aside, then the income limit used to determine whether a household is income qualified is 50 percent of the area median gross Income for all the low-income units, not just the 20 percent minimum number of units.

Line 10d is the deep rent skewed 15-40 election. This election does not replace the minimum set-aside election (10c). Every unit qualifying for the deep rent-skewed election will also qualify for purposes of the minimum set-aside.

Declaration

The declaration includes the following:

• Signature. First-Year Certification is signed under “penalties of perjury.”
• Taxpayer Identification Number (TIN). This identifies the TIN of the person signing the certification.
• The date the certification is signed.
• Name (typed or printed).
• Tax Year. This identifies the first year of the credit period.

Submission

The First-Year Certification is filed one time with the LIHTC Compliance Unit located at the Philadelphia Service Center. Owners should send the properly completed and signed form to: Department of the Treasury; Internal Revenue Service Center; Philadelphia, PA 19255-0549. The last four digits of the Zip code identify the LIHTC Compliance Unit within a larger IRS facility.

It’s important to note that your state housing agency may require you to submit a copy of Form 8609 with a completed Part II to the agency. You should contact your agency to obtain agency filing requirements.