On June 18, 2007 the Internal Revenue Service (IRS) proposed revisions to Section 1.42-10(b) of the Treasury Regulations, which concern utility allowances applicable to rent-restricted rental units in low-income housing projects. If adopted, the proposed regulations would modify both the methods permitted for the calculation of utility allowances and the application of a grace period during which any increases in utility allowances would not need to be included in rent charged to tenants.
Pursuant to Section 42(g) of the Internal Revenue Code, if any utilities are paid directly by the tenant of a rent-restricted unit, the calculation of the tenant's gross rent must include a utility allowance. The proposed modifications were drafted to address widespread concerns that (i) the existing rules governing utility allowance calculations often yield flawed results that do not accurately reflect actual utility costs and (ii) low-income housing properties should be permitted to stabilize prior to the adjustment of rents on the basis of increased utility charges.
Proposed modifications made with respect to the methods of calculation of the utility allowance for rent-restricted rental units in a building include:
Permitting estimates obtained from a utility company to include combined rates from multiple utility companies.
Permitting building owners to obtain utility estimates from the state allocation agency that has jurisdiction over the building. In establishing such estimates, the allocation agency must take into account local utility rate data, property type, climate and degree-day variables by region in the state, taxes and fees on utility charges, building materials and mechanical systems. The allocation agency would also be permitted to consider actual utility usage data and rates for the building.
Permitting building owners to obtain utility estimates by using the HUD Utility Schedule Model available on HUD's website at www.huduser.org/resources/utilmodel.html. Owners who use this method would be required to submit a copy of the calculations to the allocation agency and provide copies to tenants.
The proposed modifications also provide that inclusion of increased utility allowances in gross rents would be required only after the building has achieved 90 percent occupancy for 90 consecutive days or at the end of the first year of the credit period, whichever occurs earlier. Following such period, the existing rule, that increases in applicable utility allowance must be reflected in rental rates within 90 days of the increase, would continue to apply.
Finally, the proposed revisions include a new requirement for building owners to review at least annually the basis on which utility allowances have been determined.
The IRS is accepting written or electronically submitted comments on the proposed revisions through September 17, 2007. A public hearing on the proposed revisions will take place on October 9, 2007 at the Internal Revenue Building. If adopted, the revised regulations would be effective as of the first taxable year beginning on or after the date of publication of the adoption.