IRS Regulation I42-10

Utility Allowance Regulation Change

by Wendi Le Mense, HCCP, Royal American Management, and Scott Michael Dunn, HCCP

Source: NAHB Housing Credit Certified Professional program

"Many owners of Low Income Housing Tax Credit apartment communities are facing a multitude of hardships brought on by the economic downturn. In addition operating costs, including insurance premiums, deferred maintenance needs for aging portfolios and utility expenses continue to escalate. This has occurred while income and rent limits have remained
stagnant or increased minimally, failing to keep pace with the rising operating expenses.

A major factor in preventing owners from increasing rents to keep up with increasing operating costs has been the limited methodologies IRS regulations allowed to compute utility allowances for tax credit properties. Previous methods used to calculate utility allowances were often based on averages obtained utilizing outdated public housing units which lacked energy efficient features. In many cases, using utility allowances that are actually higher than consumption has resulted in owners having to reduce tenant-paid rents. This results in critical budget shortages endangering the financial viability of developments.

Recognizing these issues and working with the affordable housing industry, the IRS revised IRS Regulation 1.42-10 effective July 29, 2008. The adjustments expanded options and provided owners with more flexibility in the way utility allowances are calculated. The updated regulation found in 26 CFR Part I allows new options which can be used to calculate utility allowances for buildings which are not subject to the HUD or RHS building or rental assistance rules. Note: the new 8823 Guide’s Chapter 18 contains extensive information on the implementation of Regulation 1.42-10. Although we will provide highlights of the new utility allowance provisions in this article, all interested persons should read the Guide Chapter 18 for themselves."

Read the full article.