The Internal Revenue Service is planning to issue regulations that will make housing units built with tax-exempt bond financing more affordable for low-income families by requiring developers to adjust rental rates on such units for family size.
The law currently allows local housing finance agencies to issue tax-exempt bonds to finance construction or rehabilitation of apartments if the developer promises to set aside 20 percent of the units for low- and moderate-income people.
Critics of the program say, however, that because of the way the IRS has defined low and moderate income, the subsidy generally benefits higher-income renters rather than low- and moderate-income renters. Critics also have charged that, in some cases, higher-income renters have displaced those with lower incomes.
The IRS defines affordable rents for low- and moderate-income tenants as 30 percent of the income of a family earning 80 percent or less of the local median income. Median means half of those in the group are above that level and half are below it.
However, the regulation makes no provision for different family sizes. Therefore, a single person and a family of four qualify as low income at the same income level, even though the single person has more disposable income and can use a smaller apartment.
In an area with a high median income, such as Washington, rents for set-aside units in projects financed with tax-exempt bonds can be surprisingly high and still meet the requirements of the IRS regulations. In this area, a person earning $29,280 would qualify as "low income," and rents as high as $732 a month would qualify as "affordable" for a low- or moderate-income person.
The IRS says now, however, that for housing projects financed with tax-exempt bond obligations issued after Dec. 31, developers will be required to adjust rental rates for family size.
In a news release issued several weeks ago, the IRS said that the current qualifying cut-off of 80 percent of the median income will apply only for four-person families. While the release did not indicate what percentages would be used for families of other sizes, an IRS spokesman told a congressional subcommittee this summer that the IRS would lower the qualifying levels for smaller family sizes.
Under the Section 8 rent subsidy program of the Department of Housing and Urban Development, prorated qualifying levels are 80 percent of median income for a four-person family, 72 percent for a three-person family, 64 percent for a two-person family and 56 percent for a single renter. The percentages are higher than 80 percent of the median for families with more than four people.
If the IRS adopts similar percentages for qualifying incomes for projects financed with tax-exempt bonds, developers in the Washington area could not charge more for set-aside units than $686 for a family of three, $585 for a family of two and $512 for a single renter.
Some local jurisdictions, including Alexandria, Fairfax and Prince George's County, already have adopted the HUD Section 8 qualifying levels for projects financed with tax-exempt bonds, but local tenant advocates welcomed the news that the IRS is considering similar limits, saying that a federal regulation targeting these units for renters who really need them would keep developers from pressuring localities to lift locally imposed limits.
"It's long overdue," said Mark Looney, coordinator of Alexandria's Landlord-Tenant Relations Board. "This type of mechanism, which has already been adopted by some localities, will help make sure that the subsidy goes to low- and moderate-income people in every community in the United States."
A General Accounting Office study of 165 housing projects financed with tax-exempt bonds showed that, in jurisdictions where local restrictions did not narrow the federal regulations, the subsidy was going to young renters, most of whom are single, with an average income of $24,000. The national average income for renters is $14,000.
The Reagan administration has proposed eliminating tax-exempt-bond financing for residential and industrial development projects as part of its tax reform, and the oversight subcommittee of the House Ways and Means Committee held hearings on the issue this summer.
Beth Kuntz, staff director for the subcommittee, said that the IRS's plans to adjust income qualifying levels for family size would help to make the subsidy available to low- and moderate-income people. She also said, however, that several of the committee members still have concerns about the program, such as whether 80 percent of median income for a family of four is still too high to make the subsidy available to the lowest-income renters.
"The issue for the committee is, if we are going to preserve tax-exempt bond financing for low-income housing, we better get something that really is targeted to the low-income population in exchange for the tax break," Kuntz said.
The IRS is expected to issue a schedule of prorated qualifying income levels for the set-aside units this fall.