[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.42-1T]

[Page 136-148]
 
                       TITLE 26--INTERNAL REVENUE
 
     CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.42-1T  Limitation on low-income housing credit allowed with respect to qualified low-income buildings receiving housing credit allocations from a State 
          or local housing credit agency (temporary).

    (a) In general--(1) Determination of amount of low-income housing 
credit. Section 42 provides that, for purposes of section 38, a low-
income housing credit is determined for a building in an amount equal to 
the applicable percentage of the qualified basis of the qualified low-
income building. In general, the credit may be claimed annually for a 
10-year credit period, beginning with the taxable year in which the 
building is placed in service or, at the election of the taxpayer, the 
succeeding taxable year. If, after the first year of the credit period, 
the qualified basis of a building is increased in excess of the 
qualified basis upon which the credit was initially determined, the 
allowable credit with respect to such additional qualified basis is 
determined

[[Page 137]]

using a credit percentage equal to two-thirds of the applicable 
percentage for the initial qualified basis. The credit for additions to 
qualified basis is generally allowable for the remaining years in the 
15-year compliance period which begins with the first taxable year of 
the credit period for the building. In general, the low-income housing 
credit is available with respect to buildings placed in service after 
December 31, 1986, in taxable years ending after that date. See section 
42 for the definitions of ``qualified low-income building'', 
``applicable percentage'', ``qualified basis'', ``credit period'', 
``compliance period'', and for other rules relating to determination of 
the amount of the low-income housing credit.
    (2) Limitation on low-income housing credit allowed. Generally, the 
low-income housing credit determined under section 42 is allowed and may 
be claimed for any taxable year if, and to the extent that, the owner of 
a qualified low-income building receives a housing credit allocation 
from a State or local housing credit agency. The aggregate amount of 
housing credit allocations that may be made in any calendar year by all 
housing credit agencies within a State is limited by a State housing 
credit ceiling, or volume cap, described in paragraph (b) of this 
section. The authority to make housing credit allocations within the 
State housing credit ceiling may be apportioned among the State and 
local housing credit agencies, under the rules prescribed in paragraph 
(c) of this section. Upon apportionment of the State housing credit 
volume cap, each State or local housing credit agency receives an 
aggregate housing credit dollar amount that may be used to make housing 
credit allocations among qualified low-income buildings located within 
an agency's geographic jurisdiction. The rules governing the making of 
housing credit allocations by any state or local housing credit agency 
are provided in paragraph (d) of this section. Housing credit 
allocations are required to be taken into account by owners of qualified 
low-income buildings under the rules prescribed in paragraph (e) of this 
section. Exceptions to the requirement that a qualified low-income 
building receive a housing credit allocation from a State or local 
housing credit agency are provided in paragraph (f) of this section. 
Rules regarding termination of the authority of State and local housing 
credit agencies to make housing credit allocations after December 31, 
1989, are specified in paragraph (g) of this section. Rules concerning 
information reporting by State and local housing credit agencies and 
owners of qualified low-income buildings are provided in paragraph (h) 
of this section. Special statutory transitional rules are incorporated 
into this section of the regulations as described in paragraph (i) of 
this section.
    (b) The State housing credit ceiling. The aggregate amount of 
housing credit allocations that may be made in any calendar year by all 
State and local housing credit agencies within a State may not exceed 
the State's housing credit ceiling for such calendar year. The State 
housing credit ceiling for each State for any calendar year is equal to 
$1.25 multiplied by the State's population. A State's population for any 
calendar year is determined by reference to the most recent census 
estimate (whether final or provisional) of the resident population of 
the State released by the Bureau of the Census before the beginning of 
the calendar year for which the State's housing credit ceiling is set. 
Unless otherwise prescribed by applicable revenue procedure, 
determinations of population are based on the most recent estimates of 
population contained in the Bureau of the Census publication, ``Current 
Population Reports, Series P-25: Population Estimates and Projections, 
Estimates of the Population of States''. For purposes of this section, 
the District of Columbia and United States possessions are treated as 
States.
    (c) Apportionment of State housing credit ceiling among State and 
local housing credit agencies--(1) In general. A State's housing credit 
ceiling for any calendar year is apportioned among the State and local 
housing credit agencies within such State under the rules prescribed in 
this paragraph. A ``State housing credit agency'' is any State agency 
specifically authorized by gubernatorial act or State statute to

[[Page 138]]

make housing credit allocations on behalf of the State and to carry out 
the provisions of section 42(h). A ``local housing credit agency'' is 
any agency of a political subdivision of the State that is specifically 
authorized by a State enabling act to make housing credit allocations on 
behalf of the State or political subdivision and to carry out the 
provisions of section 42(h). A ``State enabling act'' is any 
gubernatorial act, State statute, or State housing credit agency 
regulation (if authorized by gubernatorial act or State statute). A 
State enabling act enacted on or before October 22, 1986, the date of 
enactment of the Tax Reform Act of 1986, shall be given effect for 
purposes of this paragraph if such State enabling act expressly carries 
out the provisions of section 42(h).
    (2) Primary apportionment. Except as otherwise provided in 
paragraphs (c) (3) and (4) of this section, a State's housing credit 
ceiling is apportioned in its entirety to the State housing credit 
agency. Such an apportionment is the ``primary apportionment'' of a 
State's housing credit ceiling. There shall be no primary apportionment 
of the State housing credit ceiling and no grants of housing credit 
allocations in such State until a State housing credit agency is 
authorized by gubernatorial act or State statute. If a State has more 
than one State housing credit agency, such agencies shall be treated as 
a single agency for purposes of the primary apportionment. In such a 
case, the State housing credit ceiling may be divided among the multiple 
State housing credit agencies pursuant to gubernatorial act or State 
statute.
    (3) States with 1 or more constitutional home rule cities--(i) In 
general. Notwithstanding paragraph (c)(2) of this section, in any State 
with 1 or more constitutional home rule cities, a portion of the State 
housing credit ceiling is apportioned to each constitutional home rule 
city. In such a State, except as provided in paragraph (c)(4) of this 
section, the remainder of the State housing credit ceiling is 
apportioned to the State housing credit agency under paragraph (c)(2) of 
this section. See paragraph (c)(3)(iii) of this section. The term 
``constitutional home rule city'' means, with respect to any calendar 
year, any political subdivision of a State that, under a State 
constitution that was adopted in 1970 and effective on July 1, 1971, had 
home rule powers on the first day of the calendar year.
    (ii) Amount of apportionment to a constitutional home rule city. The 
amount of the State housing credit ceiling apportioned to a 
constitutional home rule city for any calendar year is an amount that 
bears the same ratio to the State housing credit ceiling for that year 
as the population of the constitutional home rule city bears to the 
population of the entire State. The population of any constitutional 
home rule city for any calendar year is determined by reference to the 
most recent census estimate (whether final or provisional) of the 
resident population of the constitutional home rule city released by the 
Bureau of the Census before the beginning of the calendar year for which 
the State housing credit ceiling is apportioned. However, determinations 
of the population of a constitutional home rule city may not be based on 
Bureau of the Census estimates that do not contain estimates for all of 
the constitutional home rule cities within the State. If no Bureau of 
the Census estimate is available for all such constitutional home rule 
cities, the most recent decennial census of population shall be relied 
on. Unless otherwise prescribed by applicable revenue procedure, 
determinations of population for constitutional home rule cities are 
based on estimates of population contained in the Bureau of the Census 
publication, ``Current Population Reports, Series P-26: Local Population 
Estimates''.
    (iii) Effect of apportionments to constitutional home rule cities on 
apportionments to other housing credit agencies. The aggregate amounts 
of the State housing credit ceiling apportioned to constitutional home 
rule cities under this paragraph (c)(3) reduce the State housing credit 
ceiling available for apportionment under paragraph (c) (2) or (4) of 
this section. Unless otherwise provided in a State constitutional 
amendment or by law changing the home rule provisions adopted in a 
manner provided by the State constitution, the power of the governor or 
State legislature to apportion the State housing

[[Page 139]]

credit ceiling among local housing credit agencies under paragraph 
(c)(4) of this section shall not be construed as allowing any reduction 
of the portion of the State housing credit ceiling apportioned to a 
constitutional home rule city under this paragraph (c)(3). However, any 
constitutional home rule city may agree to a reduction in its 
apportionment of the State housing credit ceiling under this paragraph 
(c)(3), in which case the amount of the State housing credit ceiling not 
apportioned to the constitutional home rule city shall be available for 
apportionment under paragraph (c) (2) or (4) of this section.
    (iv) Treatment of governmental authority within constitutional home 
rule city. For purposes of determining which agency within a 
constitutional home rule city receives the apportionment of the State 
housing credit ceiling under this paragraph (c)(3), the rules of this 
paragraph (c) shall be applied by treating the constitutional home rule 
city as a ``State'', the chief executive officer of a constitutional 
home rule city as a ``governor'', and a city council as a ``State 
legislature''. A constitutional home rule city is also treated as a 
``State'' for purposes of the set-aside requirement for housing credit 
allocations to projects involving a qualified nonprofit organization. 
See paragraph (c)(5) of this section for rules governing set-aside 
requirements. In this connection, a constitutional home rule city may 
agree with the State housing credit agency to exchange an apportionment 
set aside for projects involving a qualified nonprofit organization for 
an apportionment that is not so restricted. In such a case, the 
authorizing gubernatorial act, State statute, or State housing credit 
agency regulation (if authorized by gubernatorial act or State statute) 
must ensure that the set-aside apportionment transferred to the State 
housing credit agency be used for the purposes described in paragraph 
(c)(5) of this section.
    (4) Apportionment to local housing credit agencies--(i) In general. 
In lieu of the primary apportionment under paragraph (c)(2) of this 
section, all or a portion of the State housing credit ceiling may be 
apportioned among housing credit agencies of governmental subdivisions. 
Apportionments of the State housing credit ceiling to local housing 
credit agencies must be made pursuant to a State enabling act as defined 
in paragraph (c)(1) of this section. Apportionments of the State housing 
credit ceiling may be made to housing credit agencies of constitutional 
home rule cities under this paragraph (c)(4), in addition to 
apportionments made under paragraph (c)(3) of this section. 
Apportionments of the State housing credit ceiling under this paragraph 
(c)(4) need not be based on the population of political subdivisions and 
may, but are not required to, give balanced consideration to the low-
income housing needs of the entire State.
    (ii) Change in apportionments during a calendar year. The 
apportionment of the State housing credit ceiling among State and local 
housing credit agencies under this paragraph (c)(4) may be changed after 
the beginning of a calendar year, pursuant to a State enabling act. No 
change in apportionments shall retroactively reduce the housing credit 
allocations made by any agency during such year. Any change in the 
apportionment of the State housing credit ceiling under this paragraph 
(c)(4) that occurs during a calendar year is effective only to the 
extent housing credit agencies have not previously made housing credit 
allocations during such year from their original apportionments of the 
State housing credit ceiling for such year. To the extent apportionments 
of the State housing credit ceiling to local housing credit agencies 
made pursuant to this paragraph (c)(4) for any calendar year are not 
used by such local agencies before a certain date (e.g., November 1) to 
make housing credit allocations in such year, the amount of unused 
apportionments may revert back to the State housing credit agency for 
reapportionment. Such reversion must be specifically authorized by the 
State enabling act.
    (iii) Exchanges of apportionments. Any State or local housing credit 
agency that receives an apportionment of the State housing credit 
ceiling for any calendar year under this paragraph (c)(4) may exchange 
part or all of such apportionment with another State or

[[Page 140]]

local housing credit agency to the extent no housing credit allocations 
have been made in such year from the exchanged portions. Such exchanges 
must be made with another housing credit agency in the same State and 
must be consistent with the State enabling act. If an apportionment set 
aside for projects involving a qualified nonprofit organization is 
transferred or exchanged, the transferee housing credit agency shall be 
required to use the set-aside apportionment for the purposes described 
in paragraph (c)(5) of this section.
    (iv) Written records of apportionments. All apportionments, 
exchanges of apportionments, and reapportionments of the State housing 
credit ceiling which are authorized by this paragraph (c)(4) must be 
evidenced in the written records maintained by each State and local 
housing credit agency.
    (5) Set-aside apportionments for projects involving a qualified 
nonprofit organization--(i) In general. Ten percent of the State housing 
credit ceiling for a calendar year must be set aside exclusively for 
projects involving a qualified nonprofit organization (as defined in 
paragraph (c)(5)(ii) of this section). Thus, at least 10 percent of 
apportionments of the State housing credit ceiling under paragraphs (c) 
(2) and (3) of this section must be used only to make housing credit 
allocations to buildings that are part of projects involving a qualified 
nonprofit organization. In the case of apportionments of the State 
housing credit ceiling under paragraph (c)(4) of this section, the State 
enabling act must ensure that the apportionment of at least 10 percent 
of the State housing credit ceiling be used exclusively to make housing 
credit allocations to buildings that are part of projects involving a 
qualified nonprofit organization. The State enabling act shall prescribe 
which housing credit agencies in the State receive apportionments that 
must be set aside for making housing credit allocations to buildings 
that are part of projects involving a qualified nonprofit organization. 
These set-aside apportionments may be distributed disproportionately 
among the State or local housing credit agencies receiving 
apportionments under paragraph (c)(4) of this section. The 10-percent 
set-aside requirement of this paragraph (c)(4) is a minimum requirement, 
and the State enabling act may set aside more than 10 percent of the 
State housing credit ceiling for apportionment to housing credit 
agencies for exclusive use in making housing credit allocations to 
buildings that are part of projects involving a qualified nonprofit 
organization.
    (ii) Projects involving a qualified nonprofit organization. The term 
``projects involving a qualified nonprofit organization'' means projects 
with respect to which a qualified nonprofit organization is to 
materially participate (within the meaning of section 469(h)) in the 
development and continuing operation of the project throughout the 15-
year compliance period. The term ``qualified nonprofit organization'' 
means any organization that is described in section 501(c) (3) or (4), 
is exempt from tax under section 501(a), and includes as one of its 
exempt purposes the fostering of low-income housing.
    (6) Expiration of unused apportionments. Apportionments of the State 
housing credit ceiling under this paragraph (c) for any calendar year 
may be used by housing credit agencies to make housing credit 
allocations only in such calendar year. Any part of an apportionment of 
the State housing credit ceiling for any calendar year that is not used 
for housing credit allocations in such year expires as of the end of 
such year and does not carry over to any other year. However, any part 
of an apportionment for 1989 that is not used to make a housing credit 
allocation in 1989 may be carried over to 1990 and used to make a 
housing credit allocation to a qualified low-income building described 
in section 42(n)(2)(B). See paragraph (g)(2) of this section.
    (d) Housing credit allocations made by State and local housing 
credit agencies--(1) In general. This paragraph governs State and local 
housing credit agencies in making housing credit allocations to 
qualified low-income buildings. The amount of the apportionment of the 
State housing credit ceiling for any calendar year received by any State 
or local housing credit agency under paragraph (c) of this section 
constitutes the

[[Page 141]]

agency's aggregate housing credit dollar amount for such year. The 
aggregate amount of housing credit allocations made in any calendar year 
by a State or local housing credit agency may not exceed such agency's 
aggregate housing credit dollar amount for such year. A State or local 
housing credit agency may make housing credit allocations only to 
qualified low-income buildings located within the agency's geographic 
jurisdiction.
    (2) Amount of a housing credit allocation. In making a housing 
credit allocation, a State or local housing credit agency must specify a 
credit percentage, not to exceed the building's applicable percentage 
determined under section 42(b), and a qualified basis amount. The amount 
of the housing credit allocation for any building is the product of the 
specified credit percentage and the specified qualified basis amount. In 
specifying the credit percentage and qualified basis amount, the State 
or local housing credit agency shall not take account of the first-year 
conventions described in section 42(f) (2)(A) and (3)(B). A State or 
local housing credit agency may adopt rules or regulations governing 
conditions for specification of less than the maximum credit percentage 
and qualified basis amount allowable under section 42 (b) and (c), 
respectively. For example, an agency may specify a credit percentage and 
a qualified basis amount of less than the maximum credit percentage and 
qualified basis amount allowable under section 42 (b) and (c), 
respectively, when the financing and rental assistance from all sources 
for the project of which the building is a part is sufficient to provide 
the continuing operation of the building without the maximum credit 
amount allowable under section 42.
    (3) Counting housing credit allocations against an agency's 
aggregate housing credit dollar amount. The aggregate amount of housing 
credit allocations made in any calendar year by a State or local housing 
credit agency may not exceed such agency's aggregate housing credit 
dollar amount (i.e., the agency's apportionment of the State housing 
credit ceiling for such year). This limitation on the aggregate dollar 
amount of housing credit allocations shall be computed separately for 
set-aside apportionments received pursuant to paragraph (c)(5) of this 
section. Housing credit allocations count against an agency's aggregate 
housing credit dollar amount without regard to the amount of credit 
allowable to or claimed by an owner of a building in the taxable year in 
which the allocation is made or in any subsequent year. Thus, housing 
credit allocations (which are computed without regard to the first-year 
conventions as provided in paragraph (d)(2) of this section) count in 
full against an agency's aggregate housing credit dollar amount, even 
though the first-year conventions described in section 42(f) (2)(A) and 
(3)(B) may reduce the amount of credit claimed by a taxpayer in the 
first year in which a credit is allowable. See also paragraph (e)(2) of 
this section. Housing credit allocations count against an agency's 
aggregate housing credit dollar amount only in the calendar year in 
which made and not in subsequent taxable years in the credit period or 
compliance period during which a taxpayer may claim a credit based on 
the original housing credit allocation. Since the aggregate amount of 
housing credit allocations made in any calendar year by a State or local 
housing credit agency may not exceed such agency's aggregate housing 
credit dollar amount, an agency shall at all times during a calendar 
year maintain a record of its cumulative allocations made during such 
year and its remaining unused aggregate housing credit dollar amount.
    (4) Rules for when applications for housing credit allocations 
exceed an agency's aggregate housing credit dollar amount. A State or 
local housing credit agency may adopt rules or regulations governing the 
awarding of housing credit allocations when an agency expects that 
applicants during a calendar year will seek aggregate allocations in 
excess of the agency's aggregate housing credit dollar amount. The State 
enabling act may provide uniform standards for the awarding of housing 
credit allocations when there is actual or anticipated excess demand 
from applicants in any calendar year.
    (5) Reduced or additional housing credit allocations--(i) In 
general. A State or local housing credit agency may not

[[Page 142]]

reduce or rescind a housing credit allocation made to a qualified low-
income building in the manner prescribed in paragraph (d)(8) of this 
section. Thus, a housing credit agency may not reduce or rescind a 
housing credit allocation made to a qualified low-income building which 
is acquired by a new owner who is entitled to a carryover of the 
allowable credit for such building under section 42(d)(7). A housing 
credit agency may make additional housing credit allocations to a 
building in any year in the building's compliance period, whether or not 
there are additions to qualified basis for which an increased credit is 
allowable under section 42(f)(3). Each additional housing credit 
allocation made to a building is treated as a separate allocation and is 
subject to the rules and requirements of this section. However, in the 
case of an additional housing credit allocation made with respect to 
additions to qualified basis for which an increased credit is allowable 
under section 42(f)(3), the amount of the allocation that counts against 
the agency's aggregate housing credit dollar amount shall be computed as 
if the specified credit percentage were unreduced in the manner 
prescribed in section 42(f)(3)(A) and the specified qualified basis 
amount were unreduced by the first-year convention prescribed in section 
42(f)(3)(B).
    (ii) Examples. The rules of paragraph (d)(5)(i) of this section may 
be illustrated by the following examples:

    Example 1. For 1987, the County L Housing Credit Agency has an 
aggregate housing credit dollar amount of $2 million. D, an individual, 
places in service on July 1, 1987, a new qualified low-income building. 
As of the close of each month in 1987 in which the building is in 
service, the building consists of 100 residential rental units, of which 
20 units are both rent-restricted and occupied by individuals whose 
income is 50 percent or less of area median gross income. The total 
floor space of the residential rental units is 120,000 square feet, and 
the total floor space of the low-income units is 20,000 square feet. Tne 
building is not Federally subsidized within the meaning of section 
42(i)(2). As of the end of 1987, the building has eligible basis under 
section 42(d) of $1 million. Thus, the qualified basis of the building 
determined without regard to the first-year convention provided in 
section 42(f) is $166,666.67 (i.e., $1 million eligible basis times \1/
6\, the floor space fraction which is required to be used instead of the 
larger unit fraction). However, the amount of the low-income housing 
credit determined for 1987 under section 42 reflects the first-year 
convention provided in section 42(f)(2). Since the building has the same 
floor space and unit fractions as of the close of each of the six months 
in 1987 during which it is in service, upon applying the first-year 
convention in section 42(f)(2), the qualified basis of the building in 
1987 is $83,333.33 (i.e., $1 million eligible basis times \1/12\, the 
fraction determined under section 42(f)(2)(A)). Under paragraph (d)(2) 
of this section, the County L Housing Credit Agency may make a housing 
credit allocation by specifying a credit percentage, not to exceed 9 
percent, and a qualified basis amount, which may be greater or less than 
the qualified basis of the building in 1987 as determined under section 
42(c), without regard to the first-year convention provided in section 
42(f)(2). If the County L Housing Credit Agency specifies a credit 
percentage of 8 percent and a qualified basis amount of $100,000, the 
amount of the housing credit allocation is $8,000. Under paragraph 
(d)(3) of this section, the County L Housing Credit Agency's aggregate 
housing credit dollar amount for 1987 is reduced by $8,000, 
notwithstanding that D is entitled to claim less than $8,000 of the 
credit in 1987 under the rules in paragraph (e) of this section. Under 
paragraph (e)(2) of this section, in 1987 D is entitled to claim only 
$4,000 of the credit, determined by applying the first-year convention 
of \6/12\ to the specified qualified basis amount contained in the 
housing credit allocation (i.e., .08x$100,000x(\6/12\)).
    Example 2. The facts are the same as in Example 1 except that on 
July 1, 1988, the number of occupied low-income units increases to 50 
units and the floor space of the occupied low-income units increases to 
48,000 square feet. These occupancy fractions remain unchanged as of the 
close of each month remaining in 1988. Under section 42(c), the 
qualified basis of the building in 1988, without regard to the first-
year convention in section 42(f)(3)(B), is $400,000 (i.e., $1 million 
eligible basis times .4, the floor space fraction which is required to 
be used instead of the larger unit fraction). D's 1987 housing credit 
allocation from the County L Housing Credit Agency remains effective in 
1988 and entitles D to a credit of $8,000 (i.e., .08, the specified 
credit percentage, times $100,000, the specified qualified basis 
amount). With respect to the additional $300,000 of qualified basis 
which the 1987 housing credit allocation does not cover, D must apply to 
the County L Housing Credit Agency for an additional housing credit 
allocation. Assume that the County L Housing Credit Agency has a 
sufficient aggregate housing credit dollar amount for 1988 to make a 
housing credit allocation to D in 1988 by specifying a credit percentage 
of 9 percent and a qualified basis

[[Page 143]]

amount of $300,000. The amount of the housing credit allocation that 
counts against the County L Housing Credit Agency's aggregate housing 
credit dollar amount is $27,000 (i.e., the amount counted (.09 times 
$300,000) is unreduced in the manner prescribed in section 42(f)(3) (A) 
and (B)). Since D's qualified basis in 1987 was $166,666.67, D is 
entitled to claim a credit in 1988 with respect to such basis of $14,000 
(i.e., .08x$100,000, the 1987 credit alllocation, +.09x$66,666.67, the 
1988 credit allocation). In addition, D is entitled to claim a credit in 
1988 and subsequent years in the 15-year compliance period with respect 
to the additional $233,333.33 of qualified basis covered by the 1988 
housing credit allocation. However, the allowable credit for 1988 with 
respect to this amount of additional qualified basis is subject to 
reductions prescribed in section 42(f)(3) (A) and (B). Thus, D is 
entitled in 1988 to a credit at a 6-percent rate applied to $116,666.67 
of additional qualified basis, which is reduced to reflect the first-
year convention. D's total allowable low-income housing credit in 1988 
is $21,000 (i.e., $14,000 with respect to original qualified basis + 
$7,000 with respect to 1988 additions to qualified basis). If the County 
L Housing Credit Agency had specified an 8-percent credit percentage in 
1988 with respect to the qualified basis not covered by the 1987 housing 
credit allocation to D, D's allowable credit with respect to the 
$233,333.33 of additions to qualified basis would not exceed, in 1988 
and subsequent years, an amount determined by applying a specified 
credit percentage of 5.33 percent (i.e., two-thirds of 8 percent). In 
1988, D's specified qualified basis amount would be adjusted for the 
first-year convention.

    (6) No carryover of unused aggregate housing credit dollar amount. 
Any portion of a State or local housing credit agency's aggregate 
housing credit dollar amount for any calendar year that is not used to 
make a housing credit allocation in such year may not be carried over to 
any other year, except as provided in paragraph (g) of this section. An 
agency may not permit owners of qualified low-income buildings to 
transfer housing credit allocations to other buildings. However, an 
agency may provide a procedure whereby owners may return to the agency, 
prior to the end of the calendar year in which housing credit 
allocations are made, unusable portions of such allocations. In such a 
case, an owner's housing credit allocation is deemed reduced by the 
amount of the allocation returned to the agency, and the agency may 
reallocate such amount to other qualified low-income buildings prior to 
the end of the year.
    (7) Effect of housing credit allocations in excess of an agency's 
aggregate housing credit dollar amount. In the event that a State or 
local housing credit agency makes housing credit allocations in excess 
of its aggregate housing credit dollar amount for any calendar year, the 
allocations shall be deemed reduced (to the extent of such excess) for 
buildings in the reverse order in which such allocations were made 
during such year.
    (8) Time and manner for making housing credit allocations--(i) Time. 
Housing credit allocations are effective for the calendar year in which 
made in the manner prescribed in paragraph (d)(8)(ii) of this section. A 
State or local housing credit agency may not make a housing credit 
allocation to a qualified low-income building prior to the calendar year 
in which such building is placed in service. An agency may adopt its own 
procedures for receiving applications for housing credit allocations 
from owners of qualified low-income buildings. An agency may provide a 
procedure for making, in advance of a building's being placed in 
service, a binding commitment (e.g., by contract, inducement, 
resolution, or other means) to make a housing credit allocation in the 
calendar year in which a qualified low-income building is placed in 
service or in a subsequent calendar year. Any advance commitment shall 
not constitute a housing credit allocation for purposes of this section.
    (ii) Manner. Housing credit allocations are deemed made when part I 
of IRS Form 8609, Low-Income Housing Credit Allocation Certification, is 
completed and signed by an authorized official of the housing credit 
agency and mailed to the owner of the qualified low-income building. A 
copy of all completed (as to part I) Form 8609 allocations along with a 
single completed Form 8610, Annual Low-Income Housing Credit Agencies 
Report, must also be mailed to the Internal Revenue Service not later 
than the 28th day of the second calendar month after the close of the 
calendar year in which the housing credit was allocated to the qualified 
low-income building. Housing

[[Page 144]]

credit allocations to a qualified low-income building must be made on 
Form 8609 and must include--
    (A) The address of the building;
    (B) The name, address, and taxpayer identification number of the 
housing credit agency making the housing credit allocation;
    (C) The name, address, and taxpayer identification number of the 
owner of the qualified low-income building;
    (D) The date of the allocation of housing credit;
    (E) The housing credit dollar amount allocated to the building on 
such date;
    (F) The specified maximum applicable credit percentage allocated to 
the building on such date;
    (G) The specified maximum qualified basis amount;
    (H) The percentage of the aggregate basis financed by tax-exempt 
bonds taken into account for purposes of the volume cap under section 
146;
    (I) A certification under penalties of perjury by an authorized 
State or local housing credit agency official that the allocation is 
made in compliance with the requirements of section 42(h); and
    (J) Any additional information that may be required by Form 8609 or 
by an applicable revenue procedure.

See paragraph (h) of this section for additional rules concerning filing 
of forms.
    (iii) Certification. The certifying official for the State or local 
housing credit agency need not perform an independent investigation of 
the qualified low-income building in order to certify on part I of Form 
8609 that the housing credit allocation meets the requirements of 
section 42(h). For example, the certifying official may rely on 
information contained in an application for a low-income housing credit 
allocation submitted by the building owner which sets forth facts 
necessary to determine that the building is eligible for the low-income 
housing credit under section 42.
    (iv) Fee. A State or local housing credit agency may charge building 
owners applying for housing credit allocations a reasonable fee to cover 
the agency's administrative expenses for processing applications.
    (v) No continuing agency responsibility. The State or local housing 
credit agency need not monitor or investigate the continued compliance 
of a qualified low-income building with the requirements of section 42 
throughout the applicable compliance period.
    (e) Housing credit allocation taken into account by owner of a 
qualified low-income building--(1) Time and manner for taking housing 
credit allocation into account. An owner of a qualified low-income 
building may not claim a low-income housing credit determined under 
section 42 in any year in excess of an effective housing credit 
allocation received from a State or local housing credit agency. A 
housing credit allocation made to a qualified low-income building is 
effective with respect to any owner of the building beginning with the 
owner's taxable year in which the housing credit allocation is received. 
A housing credit allocation is deemed received in a taxable year, except 
as modified in the succeeding sentence, if that allocation is made (in 
the manner described in paragraph (d)(8) of this section) not later than 
the earlier of (i) the 60th day after the close of the taxable year, or 
(ii) the close of the calendar year in which such taxable year ends. A 
housing credit allocation is deemed received in a taxable year ending in 
1987, if such allocation is made (in the manner described in paragraph 
(d)(8) of this section) on or before December 31, 1987. A housing credit 
allocation is not effective for any taxable year if received in a 
calendar year which ends prior to when the qualified low-income building 
is placed in service. A housing credit allocation made to a qualified 
low-income building remains effective for all taxable years in the 
compliance period. A taxpayer is required to complete the Form 8609 on 
which a housing credit agency made the applicable housing credit 
allocation and submit a copy of such Form 8609 with its Federal income 
tax return for each year in the compliance period. Failure to comply 
with the requirement of the preceding sentence with respect to any 
taxable year after the first taxable year in the credit period shall be 
treated as a mathematical or clerical error for purposes of the 
provisions of section 6213 (b)(1) and (g)(2).

[[Page 145]]

    (2) First-year convention limitation on housing credit allocation 
taken into account. For purposes of the limitation that the allowable 
low-income housing credit may not exceed the effective housing credit 
allocation received from a State or local housing credit agency, as 
provided in paragraph (e)(1) of this section, the amount of the 
effective housing credit allocation shall be adjusted by applying the 
first-year convention provided in section 42(f)(2)(A) and (3)(B) and the 
percentage credit reduction provided in section 42(f)(3)(A). Under 
paragraphs (d) (2) and (5) of this section, the State or local housing 
credit agency must specify the credit percentage and qualified basis 
amount, the product of which is the amount of the housing credit 
allocation, without taking account of the first-year convention 
described in section 42(f)(2)(A) and (3)(B) or the percentage credit 
reduction prescribed in section 42(f)(3)(A). However, for purposes of 
the limitation on the amount of the allowable low-income housing credit, 
as provided in paragraph (e)(1) of this section, in a taxable year in 
which the first-year convention applies to the amount of credit 
determined under section 42(a), the specified qualified basis amount 
shall be adjusted by the first-year convention fraction which is equal 
to the number of full months (during the first taxable year) in which 
the building was in service divided by 12. In addition, for purposes of 
the limitation on the amount of the allowable low-income housing credit, 
as provided in paragraph (e)(1) of this section, in a taxable year in 
which the reduction in credit percentage applies to additions to 
qualified basis, as prescribed in section 42(f)(3), the specified credit 
percentage shall be reduced by one-third. See examples in paragraphs 
(d)(5)(ii) and (e)(3)(ii) of this section.
    (3) Use of excess housing credit allocation for increases in 
qualified basis--(i) In general. If the housing credit allocation made 
to a qualified low-income building exceeds the amount of credit 
allowable with respect to such building in any taxable year (without 
regard to the first-year conventions under section 42(f)), such excess 
is not transferable to another qualified low-income building. However, 
if in a subsequent year there are increases in the qualified basis for 
which an increased credit is allowable under section 42(f)(3) at a 
reduced credit percentage, the original housing credit allocation 
(including the specified credit percentage and qualified basis amount) 
would be effective with respect to such increased credit.
    (ii) Example. The provisions of this paragraph (e)(3) may be 
illustrated by the following example:

    Example. In 1987, a newly-constructed qualified low-income building 
receives a housing credit allocation of $90,000 based on a specified 
credit percentage of 9 percent and a specified qualified basis amount of 
$1,000,000. The building is placed in service in 1987, but the qualified 
basis in such year is only $800,000, resulting in an allowable credit in 
1987 (determined without regard to the first-year conventions) of 
$72,000. In 1988, the qualified basis is increased to $1,100,000, 
resulting in an additional credit allowable under section 42(f)(3) 
(without regard to the first-year conventions) of $18,000 (i.e., 
$300,000 x .06, or \2/3\ of .09). The unused portion of the 1987 housing 
credit allocation ($18,000) is effective in 1988 and in each subsequent 
year in the compliance period only with respect to the specified 
qualified basis for the 1987 housing credit allocation ($1,000,000). 
Thus, the owner is allowed to claim a credit in 1988 and in each 
subsequent year (without regard to the first-year conventions), based on 
the effective housing credit allocation from 1987, of $84,000 (i.e., 
$72,000 + ($200,000 x .06)). The owner of the qualified low-income 
building must obtain a new housing credit allocation in 1988 with 
respect to the additional $100,000 of qualified basis in order to claim 
a credit on such basis in 1988 and in each subsequent year. If the 
applicable first-year convention under section 42(f)(3)(B) entitled the 
owner in 1988 to only \1/2\ of the otherwise applicable credit for the 
additions to qualified basis, under paragraph (e)(2) of this section the 
owner is allowed to claim a credit in 1988, based on the effective 
housing credit allocation from 1987, of $78,000 (i.e., $72,000 + 
($200,000 x .06 x .5)).

    (4) Separate housing credit allocations for new buildings and 
increases in qualified basis. Separate housing credit allocations must 
be received for each building with respect to which a housing credit may 
be claimed. Rehabilitation expenditures with respect to a qualified low-
income building are treated as a separate new building under section 
42(e) and must receive a separate housing credit allocation. Increases 
in qualified basis in a qualified

[[Page 146]]

low-income building are not generally treated as a new building for 
purposes of section 42. To the extent that a prior housing credit 
allocation received with respect to a qualified low-income building does 
not allow an increased credit with respect to an increase in the 
qualified basis of such building, an additional housing credit 
allocation must be received in order to claim a credit with respect to 
that portion of increase in qualified basis. See paragraph (e)(3) of 
this section. The amount of credit allowable with respect to an increase 
in qualified basis is subject to the credit percentage limitation of 
section 42(f)(3)(A) and the first-year convention of section 
42(f)(3)(B). See paragraph (d)(5) of this section for a rule requiring 
that the State or local housing credit agency count a housing credit 
allocation made with respect to an increase in qualified basis as if the 
specified credit percentage were unreduced in the manner prescribed in 
section 42(f)(3) and the specified basis amount were unreduced by the 
first-year convention prescribed in section 42(f)(3)(B).
    (5) Acquisition of building for which a prior housing credit 
allocation has been made. If a carryover credit would be allowable to an 
acquirer of a qualified low-income building under section 42(d)(7), such 
acquirer need not obtain a new housing credit allocation with respect to 
such building. Under section 42(d)(7), the acquirer would be entitled to 
claim only such credits as would have been allowable to the prior owner 
of the building.
    (6) Multiple housing credit allocations. A qualified low-income 
building may receive multiple housing credit allocations from different 
housing credit agencies having overlapping jurisdictions. A qualified 
low-income building that receives a housing credit allocation set aside 
exclusively for projects involving a qualified nonprofit organization 
may also receive a housing credit allocation from a housing credit 
agency's aggregate housing credit dollar amount that is not so set 
aside.
    (f) Exception to housing credit allocation requirement--(1) Tax-
exempt bond financing--(i) In general. No housing credit allocation is 
required in order to claim a credit under section 42 with respect to 
that portion of the eligible basis (as defined in section 42(d)) of a 
qualified low-income building that is financed with the proceeds of an 
obligation described in section 103(a) (``tax-exempt bond'') which is 
taken into account for purposes of the volume cap under section 146. In 
addition, no housing credit allocation is required in order to claim a 
credit under section 42 with respect to the entire qualified basis (as 
defined in section 42(c)) of a qualified low-income building if 70 
percent or more of the aggregate basis of the building and the land on 
which the building is located is financed with the proceeds of tax-
exempt bonds which are taken into account for purposes of the volume cap 
under section 146. For purposes of this paragraph, ``land on which the 
building is located'' includes only land that is functionally related 
and subordinate to the qualified low-income building. See Sec. 1.103-
8(b)(4)(iii) for the meaning of the term ``functionally related and 
subordinate''. For purposes of this paragraph, the basis of the land 
shall be determined using principles that are consistent with the rules 
contained in section 42(d).
    (ii) Determining use of bond proceeds. For purposes of determining 
the portion of proceeds of an issue of tax-exempt bonds used to finance 
(A) the eligible basis of a qualified low-income building, and (B) the 
aggregate basis of the building and the land on which the building is 
located, the proceeds of the issue must be allocated in the bond 
indenture or a related document (as defined in Sec. 1.103-13(b)(8)) in a 
manner consistent with the method used to allocate the net proceeds of 
the issue for purposes of determining whether 95 percent or more of the 
net proceeds of the issue are to be used for the exempt purpose of the 
issue. If the issuer is not consistent in making this allocation 
throughout the bond indenture and related documents, or if neither the 
bond indenture nor a related document provides an allocation, the 
proceeds of the issue will be allocated on a pro rata basis to all of 
the property financed by the issue, based on the relative cost of the 
property.
    (iii) Example. The provisions of this paragraph may be illustrated 
by the following example:


[[Page 147]]


    Example. In 1987, County K assigns $500,000 of its volume cap for 
private activity bonds under section 146 to a $500,000 issue of exempt 
facility bonds to provide a qualified residential rental project to be 
owned by A, an individual. The aggregate basis of the building and the 
land on which the building is located is $700,000. Under the terms of 
the bond indenture, the net proceeds of the issue are to be used to 
finance $490,000 of the eligible basis of the building. More than 70 
percent of the aggregate basis of the qualified low-income building and 
the land on which the building is located is financed with the proceeds 
of tax-exempt bonds to which a portion of the volume cap under section 
146 was allocated. Accordingly, A may claim a credit under section 42 
without regard to whether any housing credit dollar amount was allocated 
to that building. If, instead, the aggregate basis of the building and 
land were $800,000, A would be able to claim the credit under section 42 
without receiving a housing credit allocation for the building only to 
the extent that the credit was attributable to eligible basis of the 
building financed with tax-exempt bonds.

    (g) Termination of authority to make housing credit allocation--(1) 
In general. No State or local housing credit agency shall receive an 
apportionment of a State housing credit ceiling for calendar years after 
1989. Consequently, no housing credit allocations may be made after 
1989, except as provided in paragraph (g)(2) of this section. Housing 
credit allocations made prior to January 1, 1990, remain effective after 
such date.
    (2) Carryover of unused 1989 apportionment. Any State or local 
housing credit agency that has an unused portion of its apportionment of 
the State housing credit ceiling for 1989 from which housing credit 
allocations have not been made in 1989 may carry over such unused 
portion into 1990. Such carryover portion of the 1989 apportionment 
shall be treated as the agency's apportionment for 1990. From this 1990 
apportionment, the State or local housing credit agency may make housing 
credit allocations only to a qualified low-income building meeting the 
following requirements:
    (i) The building must be constructed, reconstructed, or 
rehabilitated by the taxpayer seeking the allocation;
    (ii) More than 10 percent of the reasonably anticipated cost of such 
construction, reconstruction, or rehabilitation must have been incurred 
as of January 1, 1989; and
    (iii) The building must be placed in service before January 1, 1991.
    (3) Expiration of exception for tax-exempt bond financed projects. 
The exception to the requirement that a housing credit allocation be 
received with respect to any portion of the eligible basis of a 
qualified low-income building, as provided in paragraph (f) of this 
section, shall not apply to any building placed in service after 1989, 
unless such building is described in paragraphs (g)(2) (i), (ii), and 
(iii) of this section.
    (h) Filing of forms and special rules--(1) Completed form. For 
purposes of this section, a form shall be treated as completed if the 
State or local housing credit agency or the building owner has made a 
good faith effort to complete the form in accordance with the form and 
the instructions for the form.
    (2) Manner of filing. A completed Form 8586, Low-Income Housing 
Credit, shall be filed with the owner's Federal income tax return for 
each taxable year the owner of a qualified low-income building is 
claiming the low-income housing credit during the 10-year credit period. 
A completed Form 8609 (or copy thereof) shall be filed with the owner's 
Federal income tax return for each of the 15 taxable years in the 
compliance period. If a housing credit allocation is not required to be 
received by an owner under paragraph (f) of this section, the owner 
shall obtain a blank copy of Form 8609 and fill in the address of the 
building and the name and address of the owner in part I. Part II of 
Form 8609 shall be completed by the owner of the qualified low-income 
building only for the first year the low-income housing credit is 
claimed by the building owner. Part III of Form 8609 (Statement of 
Qualification) shall be completed by the owner of the qualified low-
income building for each year of the 15-year compliance period.
    (3) Revised or renumbered forms. If any form is revised or 
renumbered, any reference in this section to the form shall be treated 
as a reference to the revised or renumbered form.
    (i) Transitional rules. The transitional rules contained in section 
252(f)(1) of

[[Page 148]]

the Tax Reform Act of 1986 are incorporated into this section of the 
regulations for purposes of determining whether a qualified low-income 
building is entitled to receive a housing credit allocation or is 
excepted from the requirement that a housing credit allocation be 
received. Housing credit allocations made to qualified low-income 
buildings described in section 252(f)(1) shall not count against the 
State or local housing credit agency's aggregate housing credit dollar 
amount. The transitional rules contained in section 252(f)(2) of the Tax 
Reform Act of 1986 are incorporated into this section of the regulations 
for purposes of determining amounts available to certain State or local 
housing credit agencies for the making of housing credit allocations to 
certain qualified low-income housing projects. Amounts available to 
housing credit agencies under section 252(f)(2) shall be treated as 
special apportionments unavailable for housing credit allocations to 
qualified low-income buildings not described in section 252(f)(2). 
Housing credit allocations made from the special apportionments shall 
not count against the State or local credit agency's aggregate housing 
credit dollar amount. The set-aside requirements shall not apply to 
these special apportionments. The transitional rules contained in 
section 252(f)(3) of the Tax Reform Act 1986 are incorporated in this 
section of the regulations for purposes of determining the amount of 
housing credit allocations received by certain qualified low-income 
buildings. Housing credit allocations deemed received under section 
252(f)(3) shall not count against the State or local housing credit 
agency's aggregate housing credit dollar amount.

[T.D. 8144, 52 FR 23433, June 22, 1987; 52 FR 24583, July 1, 1987]