HCCP Utility Allowances and Rent Calculations 1 — Questions and Answers
Question 1: Under Section 42 of the Internal Revenue Code, how is 'gross rent' defined for LIHTC compliance purposes?
- The total rental income collected by the property owner in a given month
- The contract rent charged to the tenant plus any utility allowance for tenant-paid utilities (Correct answer)
- The fair market rent for comparable units in the surrounding area
- The net rent after deducting all operating expenses from contract rent
Correct answer: The contract rent charged to the tenant plus any utility allowance for tenant-paid utilities
Gross rent under Section 42 equals the contract rent plus the utility allowance for utilities the tenant pays directly, and this combined amount cannot exceed the Section 42 maximum.
Question 2: Maximum gross rents under Section 42 are set at what percentage of the applicable income limit divided by 12?
- 25%
- 30% (Correct answer)
- 35%
- 40%
Correct answer: 30%
Section 42 caps maximum gross rents at 30% of the applicable income limit for the imputed household size, divided by 12 to arrive at the monthly figure.
Question 3: For a 1-bedroom LIHTC unit, what imputed household size is used to determine the income limit for maximum gross rent?
- 1 person
- 1.5 persons (Correct answer)
- 2 persons
- 2.5 persons
Correct answer: 1.5 persons
A 1-bedroom unit uses an imputed household size of 1.5 persons, which represents the average of the 1-person and 2-person income limits under Section 42(g)(2)(C)(ii).
Question 4: When a tenant pays utilities directly to the utility company, how must this be accounted for in the Section 42 gross rent calculation?
- The utility allowance is added to the contract rent to calculate gross rent (Correct answer)
- The utility allowance is subtracted from the published maximum rent limit
- Tenant-paid utilities are excluded from the gross rent calculation entirely
- The utility allowance reduces the amount of tax credit the owner may claim
Correct answer: The utility allowance is added to the contract rent to calculate gross rent
When tenants pay utilities directly, those costs are represented by the utility allowance, which must be added to contract rent to determine gross rent for Section 42 compliance.
Question 5: Under Treasury Regulation 1.42-10, how frequently must utility allowances be reviewed for LIHTC properties?
- Monthly
- Quarterly
- Annually (Correct answer)
- Every two years
Correct answer: Annually
Treasury Regulation 1.42-10 requires that utility allowances be reviewed and, if necessary, updated at least annually to reflect current utility costs.
Question 6: Which entity publishes the utility allowance schedule most commonly used as an approved source for LIHTC properties?
- The Internal Revenue Service
- The U.S. Department of Housing and Urban Development
- The local Public Housing Authority (PHA) (Correct answer)
- The state housing finance agency
Correct answer: The local Public Housing Authority (PHA)
The local PHA publishes utility allowance schedules that LIHTC owners may use as an approved source under Treasury Regulation 1.42-10.
Question 7: If a utility allowance increases at the annual review and causes gross rent to exceed the Section 42 maximum, what must the owner do?
- Reduce the contract rent so that gross rent does not exceed the maximum allowable amount (Correct answer)
- Apply to the state housing finance agency for a temporary gross rent waiver
- Increase the tax credit basis to offset the higher gross rent
- Notify the IRS on Form 8823 and continue charging the existing rent
Correct answer: Reduce the contract rent so that gross rent does not exceed the maximum allowable amount
When an increased utility allowance pushes gross rent above the Section 42 maximum, the owner must lower contract rent to bring total gross rent back into compliance.
HCCP Utility Allowances and Rent Calculations 1
Under Section 42 of the Internal Revenue Code, how is 'gross rent' defined for LIHTC compliance purposes?