IRS Announces New Utility Allowance Regulations

New regulations issued by the IRS on utility allowances for tax credit sites have changed the means by which each unit’s obligation is calculated.

“These new regulations are solving a critical problem that had been threatening to make a large inventory of the nation’s affordable housing financially unstable,” says Dave Cardwell, vice president of capital markets at NMHC and an expert on the low income housing tax credit (LIHTC) program.

“Sites operating according to the LIHTC program have limits on the rents they can charge to keep them affordable and those rents are further reduced when residents pay their own utility costs, but the rent reductions are not based on a renter’s actual utility costs,” Cardwell says. “Instead, the reductions were based on a flawed estimating process that looked at utility costs for older public housing sites.

These estimates tended to overestimate the utility cots in newer, more efficient tax credit sites which, in turn, unfairly reduce the rent received by owners. These lower rent levels were making it difficult—and sometimes impossible—for owners to maintain and operate their sites and cover their mortgages.” The IRS’s new rules let owners use utility estimates provided by state allocating agencies, as well as estimates provided by HUD’s new calculation methods based on computer models. And the IRS is letting owners seek certified engineering studies to estimate utilities, including water and sewer services.

“These regulations are a win-win for affordable housing providers and renters in need of affordable housing,” Cardwell says. “By helping to ensure the financial viability of these sites, the rules preserve a critical source of affordable housing.” Source: Dave Cardwell, vice president of capital markets, National Multi Housing Council, Washington, DC