2008 Income Limits Published

The 2008 income limits have been published with a February 13, 2008 effective date. As per Revenue Ruling 94-57, new income limits must be implemented no later than 45 days after HUD releases the new limit; OR HUD's effective date, whichever is later. This means you will need to implement the new limits no later than March 29, 2008.

To download your income limits, go to http://www.huduser.org/datasets/il.html. 

To assist you in calculating your property’s specific income limits and rents, download our simple Income Limit & Rent Calculator. 

To learn the proper procedures for converting HUD's income limits to Housing Credit income limits and rents, please view Housing Credits 205: Income Limits, Rents and Utility Allowances, a online course located at the Housing Credit Online Training Center where Elizabeth Moreland personally walks you through the entire process from beginning to end in a simple and understandable way!

Calculating Rents and Income Limits for the LIHC Program

It’s that time of year again . . . time to calculate new income limits and rents for your Housing Credit property. The use of the correct income limits for Housing Credit developments is crucial to compliance. HUD publishes only the 80%, 50% and 30% limits. So, for example, If you have a minimum set-aside of 60%, the HUD income limits must be converted or calculated into Housing Credit income limits. In fact, several different income limits will need to be calculated if the property has multiple set-asides. Keep in mind that the income limits must be utilized by the property within 45 days of the effective date; or publication date of the limits, whichever is later. To insure correct and timely rent and income limit calculations, I have listed the steps that should be taken each year when the new limits are published.

Calculating the Housing Credit Income Limits

Step #1: Obtain a copy of the HUD Limits

Each year when the Income Limits are published they will be posted on the HUD User website at http://www.huduser.org/datasets/il.html. 

Most state agencies will provide a chart of income limits which will include limits for the set-aside levels common in that state. If you obtain the income limits from your State Agency, then you may skip step one. Keep in mind, however, that relying on your state for rent and income limit information may not be the best course of action. Often, the State Agency is delayed or backlogged, resulting in implementation of the updated limits after the 45 day deadline. In many cases, in the rush to get income limits to Owners and Managers, the charts contain mistakes. In some cases, the Agency has calculated the income limits improperly. If you choose to use the State provided limits, it is recommended that they be double-checked for accuracy. If any discrepancies are found, report them to the State Agency immediately.

Step #2: Determine the Conversion Factor

HUD publishes only 3 sets of limits: the Very Low (VL)- 50% of area median gross income (AMGI); the Very Very Low (VVL) - 30% of AMGI and the Low (L) - 80% of AMGI. If the property has multiple set-asides, the HUD income limits must be converted to these set-aside levels using the Housing Credit Program mandated requirements. The proper calculation method is found in IRS Revenue Ruling 89-24. 

The first step in this process is to calculate a conversion factor, then multiply the 50% AMGI limits by the conversion factor to obtain the new level limits. The conversion factor is determined by dividing the AMGI level desired by 50%. For example, to obtain the 35% AMGI level, divide 35% by 50% to arrive at a conversion factor of 0.7. Some common conversion factors are: (1) 60% = 1.2; (2) 45% = 0.9; (3) 35% = 0.7 and (4) 20% = 0.4.

In 1999, HUD started publishing the 30% limits in addition to the 50% and 80% limits. Keep in mind that Housing Credit properties with units set-aside at the 30% level cannot use HUD's 30% or VVL AMGI levels rather must convert the 50% AMGI's to the 30% AMGI level for the Housing Credit Program.

Step #3: Calculate the Income Limits Required

To calculate the Housing Credit income limits, multiply the 50% AMGI figures for each household size by the appropriate conversion factor. For example, if the income limit you need is 60% of AMGI, you will need to multiply the 50% AMGI figures for each household size by the conversion factor of 1.2.

Another method of determining the income limits is to double the 50% limits to achieve the 100% limits. The 100% limits are then multiplied by the desired AMGI level. For example, the 50% limit 1 person limit of 14,650 would be doubled, giving the 100% limit of 29,300, which in turn is multiplied by 60%, giving the 60% 1 person limit of 17,580. Either the doubling method or the conversion factor method is an acceptable way of calculating the income limits.

Step #4: Don’t Round

Upon completion of the calculations, do not round the limits. HUD rounds the very low income limits to the nearest $50. The IRS states that the limits for the Tax Credit Program are not to be rounded. If the method for calculating HUD Program limits is used on the limits for the Tax Credit Program, the property could be at risk of moving in an over-income applicant.

Calculating the Maximum Allowable Rent

Once the new income limits have been calculated, the new maximum rents can be calculated for the property. First, determine if your property has a Pre-1990 Allocation or a Post-1989 Allocation. Properties that have a Pre-1990 allocation will calculate rents based on the number of occupants in the unit. Properties that have a Post-1989 allocation will calculate rents based on the number of bedrooms in the unit. The Omnibus Budget Reconciliation Act of 1993 offered owners with a Pre-1990 allocation the option of calculating rents based on the number of bedrooms. The election change had to be submitted, in writing, to the IRS no later than February 7, 1994. The new calculation method affected new residents occupying units after the date the owner made the election. Residents who were living in the community prior to the change will continue to have rent calculated by the Pre-1990 method, even if they transfer to a different unit. Most LIHC communities will use the Post-1989 method to calculate rents.

Post-1989 Method

To determine rents for a property by the Post-1989 method, you must first obtain the appropriate conversion factor for each unit size. For this purpose, the IRS has determined that 1.5 persons will occupy each bedroom. For studio or efficiency units, use the one-person income limit. For units with one or more bedrooms, multiply the number of bedrooms by 1.5. For a three-bedroom unit, you will need to obtain the income limit for 4.5 persons (3 bedrooms x 1.5 persons). To find this limit, add the four-person income limit to the five-person income limit, and divide by 2. Multiply this amount by 30%, and divide by 12. T

Pre-1990 Method

To determine rents for a property by the Pre-1990 method, simply multiply the maximum allowable income for the household size desired, multiply by 30%, and divide by 12. 

Completing the Rent Calculation

If your maximum rent amount does not come to an even dollar figure, you can not round up to the nearest dollar amount. If you choose to round, you must round down to the whole dollar amount, even if you will be losing 99 cents per unit per month. You may, however, include any of these cents in your rent. For example, if your rent calculation for a two-bedroom unit equals $536.87, you may use $536.00 or $536.87, but you may not use $537.00. Many times it is easier for on-site management, accounting personnel and residents to work with whole dollar amounts.

Calculate your new maximum rents as soon as updated median income information is received. If the median income in your area has decreased or the utility allowance increased, rents may need to be decreased. If your median income has increased, you may be able to increase your rents (providing there has been little or no change to the utility allowance). While there is no provision for the timing of implementing a rent increase, most owners will require you to raise rents as often as possible to increase cash flow. It is recommended that you complete a comprehensive market analysis to determine the feasibility of any rent increase.

In order to determine the actual rent that residents will pay, a utility allowance must be deducted from the Maximum Allowable Rent. The allowance is based on tenant paid utilities, including electricity, gas, water, sewage treatment and trash removal. Cable television service and telephone service are considered luxury items by the IRS, and are not considered as part of the utility allowance. If the owner includes all utilities with the rent payment, no allowance is deducted. Per IRS Notice 89-6, utility allowances "shall be updated at the time rents are revised" and must be put into effect within 90 days of receipt.

The source of utility allowances depends on the type of property. For RD (formerly FmHA) assisted buildings, the RD approved utility allowance must be used. For HUD assisted buildings, you must use the HUD approved allowance. If both HUD and RD regulate a building or unit, the RD allowance must be used. If HUD or RD does not assist the building, the utility allowance may be obtained from the local Public Housing Authority or from the local utility provider. If the local provider amounts are obtained, they must be used, even if they are higher than the PHA amounts. Although more difficult to obtain, it is often beneficial to use the local provider allowances. In many cases, the PHA’s allowance is much higher due to the age of the housing stock and the lack of energy efficient appliances. Remember that resident in a non-assisted building receives tenant-based Section 8 assistance, the applicable HUD allowance must be used for that unit.

If your utility allowance is not an even dollar amount, you may use the actual amount or you may round your utility allowance up to the next whole dollar amount. For example, if your utility allowance is $98.12, you may use the actual amount or round up to $99.00. It is essential that your residents pay no more than the maximum allowable rent. Charging a higher rent is non-compliance, and could cause recapture of tax credits. At minimum, residents will have to be reimbursed for any overpayment, and the noncompliance will be reported to the IRS.

Although calculating income limits, rents and the appropriate utility allowance is tedious, using the correct amounts is critical to the success of the property. To assist you with your calculations, EMC has an income limit and rent calculation spreadsheet you can download. The spreadsheet is in an Excel format, and requires that you input only the 50% limits and the desired income limit and rent level. The spreadsheet will do the rest! 

For a more thorough understanding of how income limits and rents are calculated, please view Housing Credits 205: Income Limits, Rents and Utility Allowances . In this course, Elizabeth  Moreland thoroughly illustrates this calculation process and walks you through each step. 

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