Td 9967

HIGHLIGHTS
OF THIS ISSUE




Bulletin No. 2022–44
October 31, 2022

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

ADMINISTRATIVE
T.D. 9966, page 380.
This guidance contains amendments to the regulations
relating to user fees for enrolled agents and enrolled
retirement plan agents. In accordance with the guidelines in OMB Circular A-25, the IRS has re-calculated
its cost of overseeing the enrollment and renewal program and determined that the full cost for overseeing
the renewal of enrolled retirement plan agents has
increased from $67 to $140. In addition, the cost for
overseeing both the enrollment and renewal of enrolled
agents has increased from $67 to $140. Therefore, the
regulations increase the renewal user fee for enrolled
retirement plan agents from $67 to $140. In addition,
the proposed regulations increase both the enrollment
and renewal user fee for enrolled agents from $67 to
$140.

INCOME TAX
REG-113068-22, page 405.
These proposed regulations provide recordkeeping and
reporting requirements for the average income test for
purposes of the low-income housing credit. If a building

Finding Lists begin on page ii.

is part of a residential rental project that satisfies this
test, the building may be eligible to earn low-income
housing credits. These proposed regulations affect
owners of low-income housing projects and State or
local housing credit agencies that monitor compliance
with the requirements for low-income housing credits.
Rev. Rul. 2022-19, page 379.
Fringe benefits aircraft valuation formula. For purposes
of section 1.61-21(g) of the Income Tax Regulations,
relating to the rule for valuing non-commercial flights on
employer-provided aircraft, the Standard Industry Fare
Level (SIFL) cents-per-mile rates and terminal charges
in effect for the second half of 2022 are set forth.
T.D. 9967, page 385.
These final and temporary regulations set forth guidance on the average income test under section 42(g)
(1)(C) of the Internal Revenue Code. If a building is part
of a residential rental project that satisfies this test, the
building may be eligible to earn low-income housing
credits. These final and temporary regulations affect
owners of low-income housing projects, tenants in
those projects, and State or local housing credit agencies that monitor compliance with the requirements for
low-income housing credits.

PART 300 — USER FEES
Paragraph. 1. The authority citation for
part 300 continues to read as follows:
Authority: 31 U.S.C. 9701.
Par. 2. Section 300.5 is amended by
revising paragraphs (b) and (d) to read as
follows:
§300.5 Enrollment of enrolled agent fee.
*****
(b) Fee. The fee for initially enrolling
as an enrolled agent with the IRS is $140.
*****
(d) Applicability date. This section is
applicable beginning October 31, 2022.
Par. 3. Section 300.6 is amended by
revising paragraphs (b) and (d) to read as
follows:

(Filed by the Office of the Federal Register on September 27, 2022, 8:45 a.m., and published in the
issue of the Federal Register for September 29, 2022,
87 F.R. 58968)
26 CFR 1.42-15, 26 CFR 1.42-19

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
T.D. 9967
Section 42, Low-Income
Housing Credit Average
Income Test Regulations

§300.6 Renewal of enrollment of enrolled
agent fee.

AGENCY: Internal Revenue Service
(IRS), Treasury.

*****
(b) Fee. The fee for renewal of enrollment as an enrolled agent with the IRS is
$140.
*****
(d) Applicability date. This section is
applicable beginning October 31, 2022.
Par. 4. Section 300.9 is amended by
revising paragraphs (b) and (d) to read as
follows:

ACTION:
regulations.

§300.9 Renewal of enrollment of enrolled
retirement plan agent fee.
*****
(b) Fee. The fee for renewal of enrollment as an enrolled retirement plan agent
with the IRS is $140.
*****
(d) Applicability date. This section is
applicable beginning October 31, 2022.
Paul J. Mamo,
Assistant Deputy Commissioner for
Services and Enforcement.
Approved: September 20, 2022.
Lily L. Batchelder,
Assistant Secretary of the Treasury
(Tax Policy).

Bulletin No. 2022–44

Final

and

temporary

SUMMARY: This document contains final
and temporary regulations setting forth
guidance on the average income test for
purposes of the low-income housing credit.
If a building is part of a residential rental
project that satisfies this test, the building
may be eligible to earn low-income housing credits. These final and temporary regulations affect owners of low-income housing projects, tenants in those projects, and
State or local housing credit agencies that
monitor compliance with the requirements
for low-income housing credits.
DATES: Effective date: These regulations
are effective on October 12, 2022.
Applicability date: For the applicability date of the temporary regulations, see
§1.42-19T(f).
FOR FURTHER INFORMATION
CONTACT: Dillon Taylor at (202)
317-4137.
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to the Income Tax Regulations (26 CFR

385

part 1) under section 42 of the Internal
Revenue Code (the Code).
The Tax Reform Act of 1986, Pub. L.
99-514, 100 Stat. 2085 (1986 Act), created
the low-income housing credit under section 42 of the Code.
Section 42(a) provides that the amount
of the low-income housing credit for any
taxable year in the credit period is an
amount equal to the applicable percentage (effectively, a credit rate) of the qualified basis of each qualified low-income
building.
Section 42(c)(1)(A) provides that the
qualified basis of any qualified low-income building for any taxable year is an
amount equal to (i) the applicable fraction
(determined as of the close of the taxable
year) of (ii) the eligible basis of the building (determined under section 42(d)).
Section 42(c)(1)(B) defines applicable
fraction as the smaller of the unit fraction
or floor space fraction. The unit fraction
is the number of low-income units in the
building over the number of residential
rental units (whether or not occupied) in
the building. The floor space fraction is
the total floor space of low-income units
in the building over the total floor space
of residential rental units (whether or not
occupied) in the building. Subject to certain exceptions set forth in section 42(i)(3)
(B), a low-income unit is defined in section 42(i)(3) as any unit in a building if the
unit is rent-restricted and the individuals
occupying the unit meet the income limitation under section 42(g)(1) that applies
to the project of which the building is a
part. Section 42(d)(1) and (2) define the
eligible basis of a new building or an
existing building, respectively.
Section 42(c)(2) defines a qualified
low-income building as any building
which is part of a qualified low-income
housing project at all times during the
compliance period (the period of 15 taxable years beginning with the first taxable
year of the credit period). To qualify as a
low-income housing project, one of the
section 42(g) minimum set-aside tests, as
elected by the taxpayer, must be satisfied.
Prior to the enactment of the Consolidated Appropriations Act of 2018, Pub. L.
115-141, 132 Stat. 348 (2018 Act), section
42(g) set forth two minimum set-aside
tests, known as the 20-50 test and the
40-60 test. If a taxpayer elects to apply the

October 31, 2022

20-50 test, at least 20 percent of the residential units in the project must be both
rent-restricted and occupied by tenants
whose gross income is 50 percent or less
of the area median gross income (AMGI).
If a taxpayer elects to apply the 40-60 test,
at least 40 percent of the residential units
in the project must be both rent-restricted
and occupied by tenants whose gross
income is 60 percent or less of AMGI.
The 2018 Act added section 42(g)(1)
(C), which contains a third minimum setaside test option—the average income
test. If a taxpayer elects to apply the average income test, a project meets the minimum requirements of the average income
test if 40 percent or more of the residential
units in the project are both rent-restricted
and occupied by tenants whose income
does not exceed the imputed income limitation designated by the taxpayer with
respect to the specific unit. (In the case of
a project described in section 142(d)(6),
“40 percent” in the preceding sentence is
replaced with 25 percent.) Section 42(g)
(1)(C)(ii)(I)-(III) provides special rules
relating to the income limitation for the
average income test. Specifically, unlike
the 20-50 and 40-60 tests, section 42(g)
(1)(C)(ii)(I) requires the taxpayer to designate each unit’s imputed income limitation that is taken into account for purposes of the average income test. Section
42(g)(1)(C)(ii)(II) requires the average
of the imputed income limitations designated under section 42(g)(1)(C)(ii)(I) not
to exceed 60 percent of AMGI. Finally,
section 42(g)(1)(C)(ii)(III) requires the
imputed income limitation designated for
any unit to be 20, 30, 40, 50, 60, 70, or 80
percent of AMGI.
Generally, under section 42(g)(2)(D)
(i), if the income for the occupant of a
low-income unit rises above the relevant
income limitation, the unit continues to be
treated as a low-income unit if the income
of the occupant had initially met the
income limitation and the unit continues
to be rent-restricted. Section 42(g)(2)(D)
(ii), however, provides an exception to the
general rule in the case of the 20-50 test or
the 40-60 test. Under this exception, the
unit ceases to be treated as a low-income
unit if two disqualifying conditions occur.
• The first condition is that the occupant’s income increases above 140
percent of the income limitation

October 31, 2022

applicable under section 42(g)(1)
(applicable income limitation).
• The second condition is that a new
occupant whose income exceeds the
applicable income limitation occupies any residential rental unit in the
building of a comparable or smaller
size.
In the case of a deep rent skewed project described in section 142(d)(4)(B) of
the Code “170 percent” is substituted for
“140 percent” in applying the applicable
income limitation under section 42(g)
(1), and the second condition is that any
low-income unit in the building is occupied by a new resident whose income
exceeds 40 percent of AMGI.
The exception contained in section
42(g)(2)(D)(ii) is referred to as the next
available unit rule. See also §1.42-15 of
the Income Tax Regulations.
The 2018 Act added a new next available unit rule in section 42(g)(2)(D)(iii),
(iv), and (v) for situations in which the
taxpayer has elected the average income
test. Under this new rule, a unit ceases to
be a low-income unit if two slightly different disqualifying conditions are met:
• First, the income of an occupant of a
low-income unit increases above 140
percent of the greater of (i) 60 percent
of AMGI, or (ii) the imputed income
limitation designated by the taxpayer
with respect to the unit; and
• Second, a new occupant whose
income exceeds the applicable
imputed income limitation occupies
any other residential rental unit in the
building that is of a comparable or
smaller size. The applicable imputed
income limitation for this purpose
depends upon whether the unit being
occupied was a low-income unit
before becoming vacant.
o If the new tenant occupies a unit
that was taken into account as a
low-income unit prior to becoming vacant, section 42(g)(2)(D)
(v)(I) provides that the applicable imputed income limitation
is the limitation designated with
respect to the unit.
o If the new tenant occupies a market-rate unit, section 42(g)(2)(D)
(v)(II) provides that the applicable imputed income limitation is
“the imputed income limitation

386

which would have to be designated with respect to such unit
under [section 42(g)(1)(C)(ii)(I)]
in order for the project to continue to meet the requirements
of [section 42(g)(1)(C)(ii)(II)].”
(Those requirements mandate
that the “average of the imputed
income limitations designated
under [section 42(g)(1)(C)(ii)(I)]
shall not exceed 60 percent of”
AMGI.)
Section 42(g)(2)(D)(iv) also provides
a next available unit rule for deep rent
skewed projects that elect the average
income test.
Under section 42(g), once a taxpayer
elects to use a particular set-aside test
for a project, that election is irrevocable.
Thus, if a taxpayer had previously elected
to use the 20-50 test or the 40-60 test, the
taxpayer may not subsequently elect to
use the average income test. Under section 42(g)(4), the rules of sections 142(d)
(2)(B) through (E), 142(d)(3) through (7),
and 6652(j) of the Code apply to determine whether any project is a qualified
low-income housing project and whether
any unit is a low-income unit.
Section 42(m)(1) provides that the
owners of an otherwise-qualifying building are not entitled to the housing credit
dollar amount that is allocated to the
building unless, among other requirements, the allocation is pursuant to a
qualified allocation plan (QAP). A QAP
provides standards by which a State or
local housing credit agency (Agency) is
to make these allocations. Under section
42(m)(1)(B)(iii), a QAP must contain a
procedure that the Agency or its agent will
follow in monitoring noncompliance with
low-income housing credit requirements
and in notifying the IRS of any such noncompliance. See §1.42-5 of the Income
Tax Regulations for rules implementing
this requirement.
On October 30, 2020, the Department
of Treasury (Treasury Department) and
the IRS published a notice of proposed
rulemaking (NPRM) (REG-119890-18)
in the Federal Register (85 FR 68816)
proposing regulations setting forth guidance on the average income test under
section 42(g)(1)(C). The Treasury Department and the IRS received 98 comments,
including requests to testify at a public

Bulletin No. 2022–44

hearing on the proposed regulations and
written testimony for the public hearing.
On March 24, 2021, the Treasury
Department and the IRS held a public
hearing on the proposed regulations. Fifteen taxpayers provided testimony at the
hearing.
After consideration of the comments
received and the testimony provided,
the proposed regulations are adopted as
modified by this Treasury Decision. The
major areas of comment and the revisions
to the proposed regulations are discussed
in the following Summary of Comments
and Explanation of Revisions. The comments are available for public inspection at www.regulations.gov or upon
request. Other minor, non-substantive
modifications that were made to the proposed regulations and adopted in these
final regulations are not discussed in the
Summary of Comments and Explanation
of Revisions. In addition, the Treasury
Department and the IRS are publishing
in this Treasury Decision temporary regulations containing recordkeeping and
reporting requirements that are needed
to facilitate administrability of, and compliance with, changes made in the final
regulations. Those changes were based on
comments received on the proposed rule.
These requirements are described in this
preamble along with the substantive rules
contained in the final regulations. The text
of these temporary regulations also serves
as the text of the proposed regulations
(REG–113068-22) set forth in the notice
of proposed rulemaking on this subject in
the Proposed Rules section of this issue of
the Federal Register.
Summary of Comments and
Explanation of Revisions
These final regulations and temporary
regulations set forth guidance on the average income test under section 42(g)(1)(C).
I. Section 1.42-15, Next Available Unit
Rule for the Average Income Test
The proposed regulations updated the
next available unit provisions in §1.4215 to reflect the new set-aside based on
the average income test and to take into
account section 42(g)(2)(D)(iii), (iv),
and (v). One commentator recommended

Bulletin No. 2022–44

that no changes be made to the proposed
regulations concerning the next available
unit rule when the proposed regulations
are finalized. No other comments were
received on the next available unit rule.
While no comments requested changes,
the final regulations for the next available
unit rule were revised to be consistent
with changes made to the provisions in
§1.42-19, which are described in section
II of this Summary of Comments and
Explanation of Revisions. The final regulations include revisions to the two limitations in §1.42-15(c)(2)(iv) related to the
imputed income designation of the next
available unit, which relate to the limitations described in section 42(g)(2)(D)(v).
The final regulations provide taxpayers
with administrable rules and objective
standards to apply when determining the
designation of the next available unit. The
first limitation in §1.42-15(c)(2)(iv)(A)
applies to units that met all of the requirements in §1.42-19(b)(1)(i) through (iii)
prior to becoming vacant. In other words,
the unit was rent-restricted, the occupants
satisfied the imputed income limitation
for the unit (or the unit’s low-income status continued under section 42(g)(2)(D)),
and no other provision in section 42 or the
regulations thereunder denied low-income
status to the unit. For those units, which
would have had a designated imputed
income limitation prior to vacancy, the
limitation is the unit’s designated imputed
income limitation. This rule is equivalent
to the rule in the proposed regulations,
which interpreted the definition of low-income unit as including only the requirements in §1.42-19(b)(1)(i) through (iii).
The second limitation in §1.42-15(c)(2)
(iv)(B) requires a taxpayer, in the case of
any other unit (such as a market-rate unit),
to limit the imputed income limitation
to a designation that will not cause the
average of all imputed income designations of residential units in the project to
exceed 60 percent of AMGI. This ensures
that the next available unit is designated
in such a way that maintains compliance
with the averaging requirement in section
42(g)(2)(C)(ii)(II). This revision to the
second limitation was necessary because
the proposed regulations relied on a reference to the mitigating action provisions,
which were removed from the final regulations as explained in section II.B. of this

387

Summary of Comments and Explanation
of Revisions.
Additionally, these final regulations
provide that, if multiple units are over-income at the same time in a project that
has elected the average income set-aside
(average income project) and that has
a mix of low-income and market-rate
units, then the taxpayer need not comply with the next available unit rule in a
specific order with respect to occupancy.
Instead, renting any available comparable
or smaller vacant unit to a qualified tenant
maintains all over-income units’ status as
low-income units until the next comparable or smaller unit becomes available (or,
in the case of a deep rent skewed project,
the next low-income unit becomes available). The final regulations include an
example illustrating the application of this
rule. Note, the order in which units are
designated, however, may affect the qualified group that is used for computing the
applicable fraction. See further discussion
in section II.B of this Summary of Comments and Explanation of Revisions.
II. §1.42-19, Average Income Test
A. Requirements to satisfy the average
income test
1. Proposed regulations approach to the
average income test
The proposed regulations provided
that a project for residential rental property meets the requirements of the average income test under section 42(g)(1)(C)
if (1) 40 percent or more (25 percent or
more in the case of a project described in
section 142(d)(6)) of the residential units
in the project are both rent-restricted and
occupied by tenants whose income does
not exceed the imputed income limitation
designated by the taxpayer with respect to
the respective unit; (2) the taxpayer designated the imputed income limitations in
the manner provided in §1.42-19(b) of the
proposed regulations; and (3) the average
of the designated imputed income limitations of the low-income units in the project does not exceed 60 percent of AMGI.
The proposed regulations would have
required taxpayers to complete, not later
than the close of the first taxable year of
the credit period, the initial designation of

October 31, 2022

imputed income limitations for all of the
units taken into account for the average
income test.
Under the proposed regulations, the 60
percent of AMGI limit on the average of
designated imputed income limitations
applied to all of the low-income units in
the project. The requirement as so interpreted did not take into account whether
fewer than all of those units could constitute a group of at least 40 percent of the
residential units in the project such that
the average of the limitations of the units
in that group averaged to no more than 60
percent of AMGI.
In some cases, this interpretation magnified the adverse consequences of a single
unit’s failure to maintain low-income status. For example, under the proposed regulations, a unit losing low-income status
would remove that unit’s imputed income
limitation from the computation of the
average, but not impact the low-income
status of any other units. If that unit’s limitation was less than 60 percent of AMGI,
the loss of the unit could cause the average of the remaining low-income units to
rise above 60 percent of AMGI. That noncompliant average would cause the entire
project to fail the average income test and
therefore fail to be a qualified low-income
housing project. In light of the potential
adverse consequences of the rule, the proposed regulations provided for mitigating
actions the taxpayer could take within 60
days of the close of the year for which the
average income test might be violated.
2. Comments on the proposed set-aside
rule
Many commenters disagreed with
the adequacy of the proposed mitigation
actions and with the correctness of the
underlying interpretation of the average
income test, which required testing of all
low-income units.
i. Inadequacy of the proposed mitigation
actions
Commenters noted that the mitigation
possibilities in the proposed regulations
depended on the taxpayer both appreciating that the entire project might be jeopardized by a problem with a particular unit
and knowing how to deploy the mitigation

October 31, 2022

actions. Commenters also suggested that
the mitigation proposal incorporated
such a rigid deadline that even alert and
well-advised taxpayers might be unable to
timely take mitigating actions to be eligible to receive credits for their projects.
ii. Invalidity of the underlying
interpretation
Commenters’ central concern was the
invalidity, as they saw it, of the underlying
interpretation of the average income test.
Under the interpretation in the proposed
regulations, a single unit’s falling out of
compliance could result in the complete
loss of tax credits for the entire project, or
at least loss of credits for an entire year.
Commenters noted that this result flowing
from the interpretation in the proposed
regulations suggested the invalidity of
the interpretation. Several commenters
observed that the proposed regulations
imposed on projects electing the average
income test a higher standard than that
required for satisfying the other set-aside
elections. Under the 20-50 test and 40-60
test, one noncompliant unit could not
cause an entire project to fail the set-aside
test if, without taking the noncompliant
unit into account, there remained a sufficient number of compliant units to meet
the statutory minimum percentage of all
residential units. The commenters, therefore, concluded that the interpretation in
the proposed regulations regarding the
average income test could not have been
the intent of Congress.
Most commenters recommended that
the average income test be satisfied if any
group of 40 percent of the units in the
project have designations whose average
does not exceed 60 percent of AMGI.
In general, these commenters correctly
asserted that the average income test is a
minimum set-aside test, and, therefore, a
project should meet the test if the minimum requirements of the test are satisfied,
even if low-income units not necessary for
the minimum are noncompliant.
Other commenters noted that even
though the project should additionally
meet an overall average test of no more
than 60 percent of AMGI across all
low-income units (as required by the proposed regulations), relief should nevertheless be built into the requirement. Thus,

388

if a unit is out of compliance, causing the
project-wide average to go above 60 percent of AMGI, the failure should be considered noncompliance for that unit only,
and only that non-compliant unit should
be subject to credit adjustment and recapture. They urged that this noncompliance
should not be a violation of the minimum
set-aside, provided that at least 40 percent
of the units’ designations still meet the 60
percent average.
This suggested approach, however,
could create problems similar to those
in the proposed regulations because one
unit’s noncompliance could cause the
overall average of the remaining low-income units to rise above 60 percent of
AMGI. For this reason, the comment was
not adopted, but it was considered in connection with developing the final regulations’ rules for determining low-income
units and a building’s applicable fraction,
as is discussed later.
Some commenters believed that the
average income test is satisfied as long as
the original imputed income limitations
of designated low-income units average
to 60 percent, and 40 percent or more of
those units continue to be rent-restricted
and meet their respective imputed income
limitations. Thus, the average must be met
initially, but subsequently, the requirement is permanently satisfied, regardless
of any changes in circumstances related to
occupancy. Commenters suggested that a
general anti-abuse rule could be adopted
to allow the IRS to disregard designations
made in bad faith.
The Treasury Department and the IRS
do not agree that the averaging requirement of section 42(g)(1)(C)(ii)(II) is
concerned only with the original designations. Like the other minimum setaside tests, the average income test is
an ongoing requirement for a project to
maintain its status as a qualified low-income housing project. A project failing to
maintain an average of 60 percent or less
of AMGI across at least 40 percent of its
residential units that qualify as low-income units violates the requirement. This
is consistent with a plain reading of the
statute, as the imputed income limitations
of the units taken into account (meaning, counted for purposes of meeting the
average income test) must not exceed 60
percent of AMGI. Section 42(g)(1)(C)

Bulletin No. 2022–44

(ii)(I) and (II). The rejected suggestion
would allow an original imputed income
limit designation of a subsequently disqualified unit to satisfy compliance with
the minimum set-aside test throughout the
entire compliance period. Treating such a
situation as compliant would effectively
waive the rule that a project consistently
maintain its level of affordability—a
central requirement of the low-income
housing credit. Moreover, adoption of a
general anti-abuse rule would miss many
non-compliant situations, would increase
administrative complexity for the IRS and
the Agencies and would potentially create
uncertainty for taxpayers.
A separate comment recommended
that an out-of-compliance unit should
maintain its designation if the owner can
demonstrate due diligence when completing the initial income certification. The
Treasury Department and the IRS disagree
with the suggestion that an out-of-compliance unit should not lose its designation if
the owner can demonstrate due diligence
when completing the initial income certification. Demonstrating due diligence
upon initial income certification is not
sufficient to satisfy ongoing compliance
requirements. Further, similar to a general anti-abuse rule proposed by another
commenter, this approach would increase
administrative complexity for the IRS
and Agencies and could potentially create
uncertainty for taxpayers.
3. The final regulations’ interpretation of
the average income test
In response to the comments received,
the Treasury Department and the IRS have
revised their interpretation of the set-aside
rule and incorporated the revised interpretation in the final regulations. In making
these revisions, the Treasury Department
and the IRS considered the plain language
of section 42(g)(1)(C) as well as the definition of low-income unit for projects
electing the average income test. When
section 42(g)(1)(C)(i) and the special
rules in section 42(g)(1)(C)(ii)(I) and (II)
are read together, the taxpayer satisfies the
average income test if at least 40 percent
of the building’s residential units are eligible to be low-income units and have designated imputed income limitations that
collectively average 60 percent or less of

Bulletin No. 2022–44

AMGI. A project satisfying this minimum
requirement satisfies the average income
test. Thus, the final regulations have been
revised so that it is no longer necessary to
consider all low-income units in a project
for residential rental property when determining whether the average income test is
met.
While making this change, the Treasury Department and the IRS also considered the definition of “low-income unit” in
a project electing the average income test,
and the final regulations provide a clarifying definition of this term. As the final
regulations no longer require a taxpayer
to consider all of the low-income units in
a project in order to satisfy the minimum
set-aside requirement, the issue for consideration is whether a project’s election
of the average income test has any impact
on whether a unit that is rent-restricted
and whose occupants satisfy the imputed
income limitation designated for the unit
qualifies as a low-income unit as that
term is defined in section 42(i)(3). This
determination is relevant for the average
income test as well as for purposes of the
other provisions of the low-income housing credit, including a building’s applicable fraction as explained later.
In defining the term “low-income
unit,” section 42(i)(3)(A)(ii) requires that
the individuals occupying the unit meet
the income limitation applicable under
section 42(g)(1) to the project of which
the building is a part. With respect to the
20-50 and the 40-60 minimum set-asides,
there is no difficulty in applying this language to specific units. Every unit in the
project has an identical income limitation,
namely the income limitation embodied in
the set-aside test that the taxpayer elected
for that project. If the taxpayer elects the
20-50 test, then the income limitation for
each unit is 50% of AMGI. If the taxpayer
elects the 40-60 test, the income limitation
for each unit is 60% of AMGI.
For a project electing the average
income test, however, the reference to
“the income limitation applicable … to the
project” poses a challenge because income
limitations will typically vary among the
units in the project. In addition, pursuant
to section 42(g)(1)(C)(ii)(II), the average
of the designated imputed income limitations for the units taken into account for
meeting the minimum set-side test must

389

not exceed 60% of AMGI. As a result, for
purposes of the average income test, the
fact that the occupants of a unit satisfy the
imputed income limitation designated for
that unit does not by itself establish that
the unit satisfies the requirements in section 42(i)(3)(A).
The Treasury Department and the IRS
considered interpreting the language in
section 42(i)(3)(A)(ii) as referring only
to the income limitation designated for a
specific unit. Such an interpretation would
be consistent with the approach under
the 20-50 and 40-60 tests where a single
unit’s noncompliance does not impact the
low-income status of any other low-income units in the project. It would also be
in accord with many comments that argue
the low-income status of one unit should
not impact the status of other units if those
other units meet their respective income
limitations.
In a project electing the average income
test, however, it is insufficient to read “the
income limitation applicable under [section 42(g)(1)] to the project” as referring
only to the designated imputed income
limitation applicable to a unit. Under the
average income test, a unit’s status as a
low-income unit for purposes of the setaside and the applicable fraction depends
not only on its own attributes but also on
the income limitations of other units that
are taken into account for these purposes.
In contrast, under the historic set-asides,
knowing that a unit satisfies the income
limitation applicable to the unit is sufficient to know that the unit meets the project’s income limitation for purposes of the
minimum set-aside test and a building’s
applicable fraction.
This interpretation means that to qualify as a low-income unit in a project electing the average income test, a residential unit, in addition to meeting the other
requirements to be a low-income unit
under section 42(i)(3), must be part of a
group of units such that the average of the
imputed income limitations of the units
in the group does not exceed 60 percent
of AMGI. Thus, to provide clarity on the
definition of low-income unit for a project
electing the average income test, the final
regulations include a definition of low-income unit that takes into account whether
the unit is a member of a group of units
with a compliant average limitation.

October 31, 2022

This definition of low-income unit in
the final regulations is in accord with the
definition of low-income unit as originally
described in the Conference Report for
the Tax Reform Act of 1986 (1986 Conference Report):
A low-income unit includes any unit in
a qualified low-income building if the
individuals occupying such unit meet
the income limitation elected for the
project for purposes of the minimum
set-aside requirement and if the unit
meets the gross rent requirement, as
well as all other requirements applicable to units satisfying the minimum setaside requirement.
2 H.R. Conf. Rep. 99-841, 99th Cong., 2d
Sess., II-94-95.
In that explanation, it is required that a
low-income unit meet “all other requirements applicable to units satisfying the
minimum set-aside test.” Although the
average income test was not in existence
at the time of the 1986 Conference Report,
it is apparent that Congress wanted to
avoid creating one standard for low-income units that qualified their projects
as part of the 20-50 and 40-60 minimum
set-asides and a different standard for any
other low-income units that played some
other role in the same project. Thus, it is
consistent with how low-income units are
defined under the 20-50 and 40-60 minimum set-aside tests for these final regulations to require all low-income units in an
average income project to satisfy a consistent and equal set of standards—standards
that, in the average income context, incorporate the average income limitations of
the group of which the units are a part.
Accordingly, under the final regulations, a project for residential rental property meets the requirements of the average
income test if the taxpayer’s project contains a qualified group of units that constitutes 40 percent or more (25 percent or
more in the case of a project described in
section 142(d)(6)) of the residential units
in the project. Section 1.42-19(b)(2)(i)
requires the units in a qualified group to,
first, individually satisfy the criteria that
would qualify each unit as a low-income
unit under the 20-50 or 40-60 set-asides.
Specifically, the rules in §1.42-19(b)(1)
(i) through (iii) require that each unit be
rent-restricted, occupants of the unit meet
the income limitation for the unit, and no

October 31, 2022

other provision in section 42 or the regulations thereunder denies low-income
status to the unit (including section 42(i)
(3)(B)-(E)). In addition, §1.42-19(b)(2)
(ii) requires that the average of the designated imputed income limitations of the
units in the group not exceed 60 percent of
AMGI. The group of units must be identified as required in §1.42-19(b)(3)(i). A
taxpayer identifies the units in the group
by recording the units in the taxpayer’s
books and records, and the taxpayer must
communicate that annual identification
to the applicable Agency as required in
§§1.42-19(b)(3)(iii) and 1.42-19T(c)(1) of
the associated temporary regulations. See
further description in section II.C of this
Summary of Comments and Explanation
of Revisions.
These revisions provide more flexibility for meeting the average income test
than had been available under the proposed regulations. Most importantly, the
revised rules limit the impact of one unit’s
noncompliance on the ability of a project
to satisfy the average income test. The
status of additional units beyond the minimum number of units needed to satisfy
the test does not impair satisfaction of the
average income test as discussed in section II.B of this Summary of Comments
and Explanation of Revisions. By removing the proposed requirement applicable
to all low-income units and thus allowing
a project to satisfy the average income test
if it contains a qualified group of units
meeting the minimum requirements, the
final regulations generally avoid the outsized impact that one unit’s loss of low-income status could have under the proposed regulations. The interpretation of
the average income set-aside in the final
regulations is consistent with the majority
of comments on this issue.
In addition, this interpretation creates more parallels between the average
income test and the 20-50 and 40-60 tests.
Under either of those latter tests, when
there are more than the minimum number
of low-income units, one unit going out of
compliance would not cause a project to
fail the minimum set-aside test. Similarly,
under the final regulations, one unit’s loss
of low-income status will not jeopardize
the entire project’s status as a qualified
low-income housing project subject to the
average income test if there are a sufficient

390

number of remaining units that comprise
a qualified group of units that satisfy the
minimum set-aside.
B. Determining qualified groups of
units for use in applicable fraction
determinations
1. Role of the applicable fraction under
section 42
As mentioned earlier, the amount of
low-income housing credits earned by a
building in a taxable year depends on a
computation that includes a number called
the building’s “applicable fraction” for
that year. This fraction is based on the
number and size of the low-income and
non-low-income units in the building and
can be thought of as an indicator of the
extent to which the building is dedicated
to affordable housing. Thus, the applicable fraction plays a role both in determining credits during the credit period and
in demonstrating continued dedication to
affordable housing during the extended
use period. See section 42(h)(6)(B)(i).
2. The proposed regulations’ resolution
of issues posed by computation of the
applicable fraction in an average income
project
The proposed regulations provided
an approach to addressing continuous
compliance with the average income
requirement by using the same group
of low-income units for both satisfying
the minimum set-aside requirement and
determining the applicable fraction. The
proposed regulations also provided for a
removed unit, which was a low-income
unit identified by the taxpayer that was
not taken into account for purposes of the
set-aside test or the applicable fraction but
was taken into account for purposes of
reducing recapture. As described earlier
in this Summary of Comments and Explanation of Revisions, taxpayers strongly
criticized the set-aside rule. In response,
the final regulations both allow the minimum set-aside test to be satisfied by any
qualified group of units that is no smaller
than the statutory minimum (40 percent)
and also add a clarifying definition of
“low-income unit” for projects electing
the average income test. To implement the

Bulletin No. 2022–44

statutory requirement regarding the average of the imputed income limitations of
residential units in a project, this clarifying definition is sensitive to the imputed
income limitations of the other residential
units in the same group.
The approach in the final regulations
for the average income test differs from
the other two set-asides in that the final
regulations allow for a distinction between
the group of low-income units taken into
account for satisfying the minimum setaside and the (usually larger) group of
units taken into account for computing
credits. However, under the final regulations, the units included in both groups are
subject to the same standards.
Congress acknowledged the absence of
such a distinction in the 20-50 and 40-60
tests in its discussion of the low-income
housing credit in the 1986 Conference
Report:
Qualified residential rental projects must remain as rental property
and must satisfy the minimum setaside requirement, described above,
throughout a prescribed compliance
period. Low-income units comprising
the qualified basis on which additional
credits are based are required to comply continuously with all requirements
in the same manner as units satisfying
the minimum set-aside requirements.
Units in addition to those meeting the
minimum set-aside requirement on
which a credit is allowable also must
continuously comply with the income
requirement.
2 H.R. Conf. Rep. 99-841, 99th Cong., 2d
Sess., II-95.
Thus, under the 20-50 and 40-60
tests, units included in qualified basis in
addition to those needed to satisfy the
minimum set-aside must meet the same
requirements as the units used to satisfy
the minimum set-aside. This application under the 20-50 and 40-60 tests is
straightforward, however, because all
low-income units have to be at or less
than a single elected AMGI standard,
either 50 percent or 60 percent of AMGI
(assuming other requirements are met).
Under either test, the minimum set-aside
units and any additional low-income
units are effectively interchangeable, so
there was no need to clarify treatment
between the groups.

Bulletin No. 2022–44

For the average income test, however,
units are not interchangeable because they
have a range of imputed income limitations and cannot be evaluated in isolation
because there is an income averaging
requirement in section 42(g)(1)(C)(ii)(II).
By stating that additional units beyond
those meeting the minimum set-aside
test must continuously comply with the
income requirement, the 1986 Conference
Report identified the necessity of developing a common standard for all residential units in projects electing the 20-50
and 40-60 tests. As discussed in section
II.A.3 of this Summary of Comments and
Explanation of Revisions, this principle is
reflected in the final regulations’ definition
of low-income units, and it impacts the
treatment of units that may be taken into
account for computing a building’s applicable fraction.
3. Comments on determining the
applicable fraction
In the context of the 20-50 or 40-60
minimum set-asides, commenters noted,
non-compliance by one or more units
(for example, not being suitable for occupancy) reduces a building’s applicable
fraction only with respect to the units
that are non-compliant as of the taxpayer’s year end. These commenters recommended similar treatment in the average
income context. They advocated evaluating eligibility of units for inclusion in the
applicable fraction on a unit-by-unit basis
(that is, taking into account only facts
about the particular unit, without taking into account the designated imputed
income limitation of other units).
In the context of removed units, some
comments argued that the proposed applicable fraction treatment of these units
amounted to “double counting.” Not only
did the proposed regulations exclude the
noncompliant unit from the computation
of the applicable fraction of the building
containing the unit, but by taking into
account the average of the group’s income
limitations, they could force a taxpayer to
exclude one or more compliant units from
the applicable fraction(s) of the building(s) containing the compliant unit(s).
The Treasury Department and the IRS
considered the proposal to include units
in applicable fraction computations on a

391

unit-by-unit basis but did not adopt it. To
be sure, that proposal would preserve the
requirement that units satisfying the setaside requirement must have income limitations whose average does not exceed 60
percent of AMGI. The proposal, however,
would not apply this average requirement
to the units that are taken into account
for the project’s applicable fractions. The
proposed approach would thus be inconsistent with the language of section 42(c)
(1)(C)(i), which provides that the numerator of the applicable fraction is number
of “low-income units” in the building.
As explained earlier in the discussion of
the average income test, the definition of
low-income unit for a project electing the
average income test necessarily includes
the requirement that the average of the
designated income limitations of the
units taken into account as low-income
units includes that the average designated
income limitations of the units not exceed
60% of AMGI.
In addition, the failure to apply the
average income limitation in determining
the applicable fraction would allow a taxpayer to include units in the qualified basis
even if they are a majority of the units in a
project and their average limitation greatly
exceeds 60 percent of AMGI. If accepted,
the proposal would have allowed a taxpayer to give appropriate income limitations to 40 percent of a project’s units but
to designate limitations of 80 percent of
AMGI for all the remaining low-income
units in the project and receive credits for
all of these units.
In the context of determining what
units to include in the applicable fraction,
another commenter recommended revising the proposed regulations to include an
exception for units that are not habitable
due to a casualty loss, such as from a fire
in the unit. The commenter asserted that
because the noncompliance was not the
fault of taxpayer, the regulations should
not require the taxpayer to remove another
unit from an applicable fraction to offset
the noncompliance associated with the
casualty loss. The Treasury Department
and the IRS did not adopt this suggestion. An approach that requires a determination of fault would create additional
complexity for taxpayers, Agencies, and
the IRS. In addition, while the 20-50 and
40-60 set-asides do not have the same

October 31, 2022

issue, adopting rules allowing for special
treatment in the case of casualties would
necessitate a broader section 42 regulatory
project.
4. Determination of the applicable
fraction in the final regulations
Under the final regulations, the determination of a group of units to be taken
into account in the applicable fractions
for the buildings in a project follows the
same approach as determining a group
of units to be taken into account for purposes of the set-aside test. Essentially, a
taxpayer can determine this group of units
by including the low-income units identified for the average income test, and any
other residential units that can qualify
as low-income units if they are part of a
group of units such that the average of
the imputed income limitations of all of
the units in the group does not exceed 60
percent of AMGI. If the average exceeds
60 percent of AMGI, then the group is not
a qualified group. For example, if a unit
was designated at 80 percent of AMGI
and if including that unit in an otherwise
qualified group of units causes the average
of the imputed income limitations of the
group to exceed 60 percent of AMGI, then
the taxpayer cannot include the 80 percent
unit in the otherwise qualified group. Only
the otherwise qualified group of units,
without the 80 percent unit, is a qualified
group of units used to determine the project’s buildings’ applicable fractions.
Once a qualified group of units in a
project has been identified for a taxable
year, the applicable fraction for each
building in the project is computed using
the units that are in both the qualified
group and the building at issue. (Although
the qualified group of units for a project
must have an average limitation no greater
than 60 percent of AMGI, this is not true
of the average limitation of the units used
to compute the applicable fraction of
individual buildings in the project.) This
method of determining a building’s applicable fraction applies both for ascertaining low-income housing credits earned for
a year in the credit period and for complying with the extended use requirement in
section 42(h)(6)(B)(i).
The Treasury Department and the
IRS determined that the approach to

October 31, 2022

determining the applicable fraction in the
final regulations better aligns with the
20-50 and 40-60 set-aside tests than the
approach in the proposed regulations in
that it creates parallel requirements for
both “minimum set-aside units” and any
“additional units” that may contribute to
earning low-income housing credits. This
rule in the final regulations is also consistent with the description of the low-income
units and the principle regarding set-aside
units and additional units in the other setaside tests that is described in the 1986
Conference Report discussion quoted earlier. The rule is also consistent with comments stating that the low-income units in
a project should have an overall average
that does not exceed 60 percent of AMGI.
The potential downside of this
approach to an owner is that if one unit
loses low-income status, then it is possible
that other units’ status as low-income units
may be impacted. Specifically, an owner
may have to exclude one or more otherwise qualifying units from the qualified
group of units for use in applicable fraction determinations for the group to retain
an average income limitation that does not
exceed 60% of AMGI. This, however, will
not always be the case. For example, if a
unit designated at 60, 70, or 80 percent
of AMGI loses low-income status and no
other changes occurred, then the owner
could maintain the required average limitation of the qualified group of units without excluding any of the other units from
the qualified group of units that had been
taken into account in the previous year.
Also, as is discussed later, in some cases
a unit may be included in the qualified
group of units after its income limitation
has been designated or redesignated to a
lower income limitation.
5. Proposed regulations’ special rule for
determining the applicable fraction for
purposes of recapture
The proposed regulations, in some
cases, would have caused a compliant low-income unit with a relatively
high-income limitation not to have been
taken into account in computing low-income housing credits earned for a year
in the credit period. The mechanisms for
achieving this result were called “mitigating actions” and “removed units”. To

392

minimize recapture, the proposed regulations would have included these units in
the computations underlying section 42(j)
so that the units’ inclusion avoided having their absence contribute to recapture
of credits. As described in section II.B.6.
of this Summary of Comments and Explanation of Revisions, however, the Treasury Department and the IRS deleted the
mitigating actions concept from the final
regulations. For this reason, the final regulations do not include the proposed regulations’ rule related to recapture.
6. Deletion of Mitigating Actions from
Final Regulations
As described previously, the proposed
regulations would have created a risk
that, in some situations, one unit losing its
low-income status could have caused an
entire project to fail the average income
test. To reduce that risk, the proposed regulations described two possible mitigating
actions that a taxpayer could have taken to
avoid disqualifying the project. Because
the final regulations differ from the proposed regulations in a way that avoids
that risk, there is no longer a need for mitigating actions. For this reason, the final
regulations do not include rules related to
mitigating actions.
C. Recordkeeping and Reporting
Requirements
In response to comments on the proposed rule, the final rule provides significant flexibility regarding the qualified
group of units used to satisfy the average
income set-aside and the qualified group
of units used for purposes of computing
the applicable fraction. Providing the
requested flexibility necessitates that the
taxpayer have the discretion and responsibility to make these identifications and
that the contemporary identification of the
units be unambiguous.
Specifically, to implement the changes
made in response to the comments on the
proposed rule, §1.42-19(b)(3) of the final
regulations provides that a taxpayer separately identifies (i) units in the qualified
group of units used for satisfying the average income set-aside and (ii) units in the
qualified group for purposes of the applicable fractions. Section 1.42-19T(c)(1) of

Bulletin No. 2022–44

the temporary regulations requires that
this be done by recording these identifications in the taxpayer’s books and records
(where the identification must be retained
for a period not shorter than the record
retention requirement under §1.42-5(b)
(2)) and by communicating that identification annually to the applicable Agency.
These rules promote certainty and administrability. The rules, in conjunction with
the other procedures provided in §1.4219T(c)(3), will allow taxpayers, Agencies, and the IRS to more easily verify
the status, including the average imputed
income limitation, of the qualified group
of units used for purposes of satisfying the
average income set-aside and the qualified
group of units used for purposes of determining the applicable fraction(s).
In addition, taxpayers are required to
report specified information to Agencies
and to maintain records in sufficient detail
to establish the accuracy of the project’s
applicable fractions, the satisfaction of the
average income set-aside, and compliance
with requirements in section  42 and the
applicable regulations. Section 1.6001-1
requires the keeping of records “sufficient to establish the  amount  of  gross
income, deductions, credits, or other matters required to be shown by such  person in any return of such tax or information.” See §§ 1.6001-1 and 1.42-5.
D. Designation of Imputed Income
Limitations and Identification of Units
Section 42(g)(1)(C)(ii) contains substantive requirements for income limitations applicable in the average income
test. Specifically, the taxpayer must designate the imputed income limitation for
each unit taken into account under the
average income test; the average of those
imputed income limitations cannot exceed
60 percent of AMGI; and the designated
imputed income limitation of any unit must
be 20, 30, 40, 50, 60, 70, or 80 percent of
AMGI. That statutory provision, however,
does not contain procedural requirements
to specify the manner in which taxpayers
must designate the imputed income limitation of units.
Filling this gap, the proposed regulations added procedural requirements that
a taxpayer must designate each imputed
income limitation in accordance with: (1)

Bulletin No. 2022–44

any procedures established by the IRS in
forms, instructions, or publications or in
other guidance published in the Internal
Revenue Bulletin pursuant to §601.601(d)
(2)(ii)(b); and (2) any procedures established by the Agency that has jurisdiction
over the low-income housing project that
contains the units to be designated, to the
extent that those Agency procedures are
consistent with IRS guidance and the governing regulations.
No negative comments were submitted
regarding these provisions, but, on review,
and in conjunction with other revisions
made based on comments received, the
Treasury Department and the IRS determined that more detailed designation rules
were needed to promote certainty and
administrability. Section 1.42-19T(c)(3)
(iv) of the temporary regulations provides
that a taxpayer designates a unit’s imputed
income limitation by recording the limitation in its books and records, where it
must be retained for a period not shorter
than the record retention requirement
under §1.42-5(b)(2). The final regulations
require the initial designation of a unit to
be made no later than when a unit is first
occupied as a low-income unit. See §1.4219(c)(3)(i). Under §1.42-19T(c)(3)(iv) of
the temporary regulations, the designation
must also be communicated annually to
the applicable Agency, and the applicable
Agency may establish the time and manner in which information is provided to it.
See §1.42-19T(c)(2)(i).
In the context of the final regulations’
provision of significant flexibility with
respect to satisfying the average income
test and identifying a qualified group of
units, these designation and identification
rules will facilitate taxpayer access to this
additional flexibility. Providing a specific
method of designation will give taxpayers more certainty than the proposed regulations as to how to meet the statutory
requirement of designation. The rule will
also benefit administration by ensuring a
contemporaneous record of designation,
without creating a significant burden
on taxpayers. The final regulations also
revise timing of the designation so that
it is no longer required by the end of the
first year of the credit period, and instead
is based on when a unit is first occupied as
a low-income unit. This rule better aligns
the timing of designation with the rental

393

of low-income units and should allow a
taxpayer to make designations after having a chance to evaluate the market for a
particular unit. Finally, requiring annual
communication of the information to the
applicable Agency will help the Agency
determine whether a project is in compliance with the requirements of section 42.
The temporary regulations give flexibility
to Agencies to determine the best time and
manner for taxpayers to communicate the
information so each Agency can ensure
the system best serves that particular
Agency with minimal burden.
Importantly, the temporary regulations
also provide Agencies with the discretion,
on a case-by-case basis, to waive in writing
any failure to comply with the temporary
regulations’ recordkeeping and reporting
requirements. See §  1.42-19T(c)(4). The
waiver may be done up to 180 days after
discovery of the failure, whether by taxpayer or Agency. At the discretion of the
applicable Agency, this waiver may treat
the relevant requirements as having been
satisfied.
In providing Agencies with the ability
to waive and the timeline for waiving, the
Treasury Department and the IRS considered comments made in response to
the proposed regulations regarding the
rules for “removed units” and the timing for completing “mitigating actions.”
In response to the proposed regulations’
rules on removed units, Agencies commented that they do not have authority to
determine the tax consequences of noncompliance with respect to the requirements of section 42, and, instead, Agencies are only responsible for determining
the existence of noncompliance itself. The
ability of Agencies to waive the failure to
comply with the procedural requirements
provided by the final regulations is not
inconsistent with the scope of Agency
responsibility, and the IRS itself will ultimately determine the tax consequences of
noncompliance.
With respect to timing, many commenters suggested that a 60-day period
in which to take mitigating actions beginning on the first day after the year of
noncompliance was too short and began
before the noncompliance may be known.
Commenters recommended various time
periods, and also suggested that the time
period run from the time of discovery of

October 31, 2022

the noncompliance. Although the Agency
waiver rule in the temporary regulations
involves a different situation, commenters’ recommendations provide valuable
information regarding Agencies’ need
for a sufficient period of time to consider
whether to grant the waiver and that this
time period should begin when the failure
to comply is discovered. Thus, the temporary regulations provide that the period
to provide a waiver is the 180-day period
after discovery of the failure to comply by
taxpayer or Agency.
E. Timing of designation of income
limitations
One commenter expressed concern
that, in some situations, a multiple-building project claims the section 42 credit
beginning in two different years depending on when the different buildings in the
project are fully leased, and thus, the credit
period for one building in the project may
begin in one taxable year and the credit
period for a second building in the same
project may begin during the subsequent
taxable year. In such a situation, the commenter requested, the regulations should
permit the taxpayer to make unit designations at the end of the respective taxable
years in which the credit period begins for
each building in the same project.
The final regulations require a designation of the imputed income limitation for
a unit by the time the unit is first occupied
as a low-income unit, which could take
place in different taxable years for different units. This rule also allows conversion
of a market-rate unit to low-income status,
with designation of an income limitation
occurring any time before it is first occupied as a low-income unit. Thus, the final
regulations provide the flexibility that may
be needed by multiple-building projects.
In addition, as described later, the final
regulations permit the changing of a unit’s
imputed income limitation in certain circumstances. For an unoccupied unit that
is subject to a change in imputed income
limitation, the final regulations provide
that the taxpayer must designate the unit’s
changed imputed income limitation prior
to occupancy of that unit. For an occupied
unit that is subject to a change in imputed
income limitation, the taxpayer must designate the unit’s changed imputed income

October 31, 2022

limitation prior to the end of the taxable
year in which the change occurs.
F. Changing a Unit’s Imputed Income
Designation
1. The proposed regulations on changes
to income designations
In general, the proposed regulations
did not allow income limitations to be
changed after they had been designated.
The preamble to the proposed regulations, however, requested comments
on an alternative mitigating approach
for situations in which a unit losing status as a low-income unit had caused the
average of unit limitations to rise above
60 percent of AMGI as of the close of a
taxable year. The mitigating approach
would have allowed the taxpayer to redesignate the imputed income limitation of a
low-income unit to return the average of
unit limitations to 60 percent of AMGI or
lower.
2. Comments seeking ability to change
designations
Numerous commenters disagreed with
the proposed regulations’ disallowance of
modifying the designated imputed income
limitation of a unit. In general, these commenters stressed that greater flexibility to
change unit designations would align with
what multiple Agencies had been pursuing to implement existing State and local
policies. Some commentators observed
that the proposed regulations may conflict with other Federal or State laws or
programs that, in certain cases, require
rental housing to accommodate a tenant’s
need to move to another unit. Additionally, some commentators noted that after
enactment of section 42(g)(1)(C), some
Agencies adopted their own guidance
with which the subsequently published
proposed regulations were in conflict.
Multiple commenters recommended
that the final regulations allow taxpayers to modify unit designations if the
Agency with jurisdiction over the project at issue allows for that in its policies
and the Agency consents to the change.
A different commenter suggested that
the final regulations should allow taxpayers to adjust imputed income limitation

394

designations over time, provided that the
taxpayer’s adjusted designations continue
to satisfy the requirements of the average
income test (that is, at all times 40 percent of the units remain rent-restricted and
occupied by tenants whose income does
not exceed the imputed income limitation
designated by the owner, and the average
of the imputed income limitation designations does not exceed 60 percent of AMGI
in any given year).
3. Final regulations on changing
designations of income limitations
The Treasury Department and the IRS
agree with taxpayers that the final regulations should allow greater flexibility
in changes in unit designations than the
proposed regulations did. Because not all
Agencies may want the exact same standards for permitting redesignations, the
final regulations address these taxpayer
concerns by providing Agencies significant flexibility in determining procedures.
Under the final regulations, a taxpayer
may change the imputed income limitation designation of a previously designated low-income unit in any of the following circumstances:
(1) In accordance with any procedures
established by the IRS in forms, instructions, or guidance published in the Internal
Revenue Bulletin pursuant to §601.601(d)
(2)(ii)(b) of this chapter.
(2) In accordance with an Agency’s
publicly available written procedures, if
those procedures are available to all of the
Agency’s projects that have elected the
average income test.
(3) To enhance protections set forth in
the Americans With Disabilities Act of
1990 (ADA), Pub. L. 101-336, 104 Stat.
328; the Fair Housing Amendments Act
of 1988, Pub. L. 100-430, 102 Stat.1619;
the Violence Against Women Act of 1994,
Pub. L. 103-322, 108 Stat. 1902; the Rehabilitation Act of 1973, Pub. L. 93-112, 87
Stat. 394; or any other State, Federal, or
local law or program that protects tenants and that is identified by the IRS or an
Agency in a manner described in (1) or (2)
above. The tenant protections that apply to
an average-income project and that redesignation may enhance do not necessarily
have any specific connection to section
42. For example, the protections may be

Bulletin No. 2022–44

ones that apply to all multifamily rental
housing, or they may apply to the project at issue because some congressionally
authorized spending supported the project
with Federal financial assistance. Even if
a tenant protection does not legally apply
to a particular average-income project
but does apply to analogous multifamily
rental housing, the owner of the project
may redesignate income limitations to
implement the protection for the project’s
residents.
(4) To enable a current income-qualified tenant to move to a different unit
within a project keeping the same income
limitation (and thus the same maximum
gross rent), with the newly occupied unit
and the vacated unit exchanging income
limitations.
(5) To restore the required average
income limitation for purposes of identifying a qualified group of units either for
purposes of satisfying the average income
set-aside or for purposes of identifying
the units to be used in computing applicable fraction(s). This rule is limited to
newly designated, or redesignated, units
that are vacant or are occupied by a tenant
that would satisfy the new, lower imputed
income limitation.
Also, the temporary regulations provide that a taxpayer effects a change
in a unit’s imputed income limitation
by recording the limitation in its books
and records, where it must be retained
for a period not shorter than the record
retention requirement under §1.42-5(b)
(2). See §1.42-19T(d)(2). The new designation must also be communicated
to the applicable Agency in the time
and manner required by the applicable
Agency and must become part of the
annual report to the Agency of income
designations. As part of its discretion to
specify the manner of communicating
the new designation, the Agency may,
if it wishes, require identification of
the justification for the redesignation.
The prior designation must be retained
in the books and records for the period
specified in §1.42-19T(c)(3)(iv). These
requirements for redesignations are consistent with those for initial designation
of a unit’s imputed income limitation
and, similarly, are intended to increase
both certainty and administrability with
respect to redesignations.

Bulletin No. 2022–44

G. Applicability Dates
Three commenters recommended that
the final regulations should provide relief
for projects that have elected the average
income minimum set-aside prior to the
publication of the final rule. These commenters suggested that taxpayers that
elected the average income test before
the finalization of the regulations did so
based on a set of expectations that may be
in conflict with how the final regulations
actually work. For example, one commenter stated that the final regulations
should provide taxpayers the opportunity
to choose a different minimum set-aside.
Section 42 provides that an election
of a minimum set-aside is irrevocable.
Therefore, these final regulations do not
permit taxpayers to change a minimum
set-aside election.
In general, the final regulations apply
to taxable years beginning after December
31, 2022. Section 1.42-19(f)(2) provides
rules for residential units in projects that
were already occupied prior to the applicability date of the regulations. The final
regulations in both §§1.42-15(i)(2) and
1.42-19(f)(3) also contain provisions that
make them more broadly available for
taxpayers that desire their application. For
taxable years prior to the first taxable year
to which these regulations apply, taxpayers may rely on a reasonable interpretation
of the statute in implementing the average
income test for taxable years to which
these regulations do not apply.
H. Good Cause
For the reasons discussed above, the
Treasury Department and the IRS consider the recordkeeping and reporting
requirements contained in the temporary
regulations to be a logical outgrowth of
the proposed rule. In any event, the Treasury Department and the IRS determine
that there would be good cause to issue
the temporary regulations contained in
this Treasury Decision without additional
notice and the opportunity for public comment. This action may be taken pursuant
to section 553(b)(3)(B) of the Administrative Procedure Act, which provides
that advance notice and the opportunity
for public comment are not required with
respect to a rulemaking when an “agency

395

for good cause finds (and incorporates the
finding and a brief statement of reasons
therefor in the rules issued) that notice and
public procedure thereon are impracticable, unnecessary, or contrary to the public interest.” Under the “public interest”
prong of 5 U.S.C. 553(b)(3)(B), the good
cause exception appropriately applies
where notice-and-comment would harm,
defeat, or frustrate the public interest,
rather than serving it.
It would frustrate the public interest to
delay the applicability date of the regulations until the recordkeeping and reporting requirements have received additional
notice and comment. Taxpayers are seeking to rely on the substantive final regulations as soon as possible, and taxpayers
cannot do so prior to the applicability date
of the requirements in the temporary regulations. In general, these substantive final
regulations provide significant flexibility with respect to satisfying the average
income test, identifying a qualified group
of units for use in the average income setaside test and applicable fraction determinations, and changing the imputed
income limitation designations of residential units. This increased flexibility was
in response to taxpayer comments on the
proposed regulations, including taxpayer
complaints about burdens in the proposed
regulations. The increased regulatory flexibility, in turn, necessitates these recordkeeping and reporting requirements to
enhance administrability and certainty for
the taxpayers and Agencies that will be
taking advantage of the flexibility. In addition, these requirements are minimally
burdensome. The recordkeeping requirements are similar to existing recordkeeping requirements for low-income housing
projects, and Agencies may specify the
time and manner of communication of
regulatorily required information and may
waive any failure to comply.
There is also good cause to find notice
is “unnecessary” within the meaning
of  5 U.S.C. 553(b)(3)(B). The Treasury
Department and the IRS are responding
to commenters by providing the flexibility they sought, which requires enhanced
tracking to prevent abuse. The recordkeeping additions do not alter the substance of the basic rule provisions, which
are a logical outgrowth of the NPRM. And
because the recordkeeping requirements

October 31, 2022

provide what is minimally necessary to
ensure compliance and oversight, soliciting further comment would not alter these
minimal recordkeeping requirements.
Accordingly, the Treasury Department
and the IRS have determined that notice
is unnecessary and that it is in the public
interest to allow expedited reliance on the
recordkeeping and reporting requirements
contained in the temporary regulations. At
the same time, as set forth above, the Treasury Department and the IRS are soliciting
comments on the recordkeeping and reporting requirements in the notice of proposed
rulemaking published contemporaneously
with this final rule. At the time of publication, the Office of Management and Budget
(OMB) has considered and approved these
recordkeeping and reporting requirements
under the Paperwork Reduction Act so that
taxpayers can rapidly access the flexibility
provided in these final regulations regarding the average income test.
Special Analyses
Regulatory Planning and Review –
Economic Analysis
Executive Orders 12866 and 13563
direct agencies to assess costs and benefits of available regulatory alternatives
and, if regulation is necessary, to select
regulatory approaches that maximize net
benefits (including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting flexibility.
These final regulations have been designated as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018)
(MOA) between the Treasury Department
and the Office of Management and Budget (OMB) regarding review of tax regulations. The Office of Information and
Regulatory Affairs has designated these
final regulations as significant under section 1(b) of the MOA.
A. Background
The Tax Reform Act of 1986, Pub.
L. 99-514, 100 Stat. 2085, created the

October 31, 2022

low-income housing credit under section
42 of the Code. Section 42(a) provides
that the credit amount earned by a qualified low-income building depends on
the number of low-income units in the
building, among other factors. Among
other requirements, a low-income unit as
defined in section 42(i)(3) must be rent-restricted, and the individuals occupying
the unit must meet the income limitation
applicable to the project of which the
building is a part.
To qualify as a low-income housing
project, one of the section 42(g) minimum
set-aside tests, as elected by the taxpayer,
must be satisfied. Prior to the enactment
of the Consolidated Appropriations Act
of 2018, Pub. L. 115-141, 132 Stat. 348
(2018 Act), section 42(g) set forth two
minimum set-aside tests, known as the
20-50 test and the 40-60 test. Under the
20-50 test, at least 20 percent of the residential units in the project must be both
rent-restricted and occupied by tenants
whose gross income is 50 percent or less
of AMGI. Under the 40-60 test, at least
40 percent of the residential units in the
project must be both rent-restricted and
occupied by tenants whose gross income
is 60 percent or less of AMGI. To be rent
restricted, a unit must have maximum
gross rent no more than 30 percent of the
unit’s income limitation.
The 2018 Act added section 42(g)(1)
(C), which contains a third minimum setaside test—the average income test. A
project meets the minimum requirements
of the average income test if 40 percent or
more of the residential units in the project are both rent-restricted and occupied
by tenants whose income does not exceed
the imputed income limitation designated
by the taxpayer with respect to the specific
unit. (In the case of a project described in
section 142(d)(6), 40 percent in the preceding sentence is replaced by 25 percent.)
For a project to meet the average income
test, among other criteria, the average of
the imputed income limitations must not
exceed 60 percent of AMGI.
B. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of
these final regulations relative to a no-action baseline reflecting anticipated Federal

396

income tax-related behavior in the absence
of these regulations.
C. Economic Analysis
These final regulations provide guidance on the average income test under
section 42(g)(1)(C). Despite the absence
of this guidance, between 2018 and 2022
approximately 200 taxpayers elected the
average income test for projects containing, in the aggregate, just over 2,000
buildings. With the benefit of this guidance, we project that an additional 100
taxpayers will elect the average income
test annually, for around 1,000 buildings
in aggregate, relative to a baseline scenario of no guidance.
These final regulations are expected to
increase election of the average income
test because the regulations will reduce
uncertainty regarding the interpretation
of 42(g)(1)(C). Absent these regulations,
some taxpayers might shy away from the
average income test, fearing adverse tax
consequences if their interpretation of the
statute is determined to be incorrect as
well as lost time and expense for litigation, even if their interpretation is eventually confirmed. Instead, these or other
taxpayers would elect either the 20-50 test
or the 40-60 test.
Projects electing the average income
test may be more financially stable and
more likely to be mixed income than if
they had to rely on the 20-50 or 40-60
tests; however, in aggregate, the final regulations are expected to have essentially
no immediate effect on the number of
affordable housing units produced. The
pool of potential low-income housing
credits allocated by state housing agencies is capped annually and is generally
oversubscribed. Thus any increase in allocated credits flowing to projects electing
the average income test is expected to be
offset by a concomitant reduction in credits flowing to projects electing one of the
other two set-aside tests.
Despite having no measurable impact
on the stock of affordable housing, these
final regulations will likely have some
economic effect. First, there will likely be
a minor efficiency gain to taxpayers electing the average income set-aside compared to the situation of taxpayers that,
in the absence of this guidance, would

Bulletin No. 2022–44

experience uncertainty interpreting section
42(g)(1)(C). These taxpayers may save on
consulting fees or hours of effort. Second,
there may be a minor efficiency gain from
avoiding time spent in litigation regarding the interpretation of section 42(g)(1)
(C). These are unambiguous benefits of
providing the final regulations, even if
quantitatively small. Third, there may be
costs associated with the record-keeping
requirements of these final regulations. In
Section II of these Special Analyses, we
estimate that the annual paperwork burden
for this regulation is $676,712 in aggregate. These costs fall upon low-income
housing tax credit (LIHTC) building owners who choose to incur them when electing the average income test.
Less directly, the final regulations
will likely result in a marginal geographic redistribution in the location of
LIHTC-supported housing, away from
densely populated areas and towards more
sparsely populated ones. Absent an option
to elect the average income test, property owners seeking LIHTCs must rely
on either the 20-50 or 40-60 tests. These
tests set a single income standard for all
LIHTC-generating units in a building. For
a building to be financially feasible, its
owners must be confident that there is a
sufficiently large pool of potential renters
having incomes in these relatively narrow ranges (just under 50 or 60 percent of
AMGI). These conditions are more easily
met in densely populated areas.
In contrast, with income averaging,
developers have leeway to establish a
variety of income limitations in a building.
Thus, in a sparsely populated area where
there are not enough people in the relatively narrow required range of incomes
to support a 20–50 or 40–60 building, an
average income building may be financially feasible. Despite the low population
density, the wider range of potential tenant
incomes may enable the building owner to
fill the low-income units with qualifying
tenants from that vicinity. That ability
could make the difference in whether or
not the project is feasible.
To be sure, most of the effect of the
average income test on the geographic
distribution of affordable housing is a
direct consequence of statutory amendments to section 42 made by the 2018 Act,
independent of this regulatory guidance.

Bulletin No. 2022–44

However, to the extent that the final regulations encourage some taxpayers to use
the average income test who otherwise
would not, the regulations reinforce the
statutory effect. The end result is a marginal transfer of economic well-being
from renters and LIHTC property developers in densely populated areas towards
renters and LIHTC property developers in
sparsely populated areas.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(44 U.S.C. 3501-3520) (PRA) requires
that a Federal agency obtain the approval
of OMB before collecting information
from the public, whether such collection
of information is mandatory, voluntary,
or required to obtain or retain a benefit.
The collections of information contained
in these regulations has been approved by
OMB under control number 1545-0988.
The collections of information that are
needed for certainty and administrability of the final regulations are included
in §1.42-19T of the temporary regulations. Section 1.42-19T(c)(1) provides
recordkeeping and reporting requirements
related to the identification of a qualified
group of units for each of (i) satisfaction
of the average income set-aside test and
(ii) applicable fraction determinations.
Section 1.42-19T(c)(2) provides reporting
requirements to the Agency with jurisdiction over a project. Section 1.42-19T(c)(3)
(iv) provides recordkeeping and reporting
requirements related to designations of the
imputed income limitations for residential
units. Section 1.42-19T(d)(2) provides
recordkeeping and reporting requirements
related to changing a unit’s designated
imputed income limitation.
This information in the collections of
information will generally be used by the
IRS and Agencies for tax compliance purposes and by taxpayers to facilitate proper
reporting and compliance. Specifically, the
collections of information in §1.42-19T
apply to taxpayer owners of projects that
receive the low-income housing credit and
elect the average income set-aside. With
respect to the recordkeeping requirements
in §1.42-19T(c)(3)(iv) and (d)(2) and section 42(g)(1)(C)(ii)(I) requires that the
taxpayer designate the imputed income
limitations of the units taken into account

397

for purposes of the average income test.
Thus, the recordkeeping requirements that
are provided allow for a process of designation that will result in a reliable record
of both the original designations of the
imputed income limitations of low-income units and any redesignations of
units’ limitations within a project.
The recordkeeping rules in §1.4219T(c)(1) with respect to a qualified
group of units are similarly needed to
ensure there is a reliable record to show
that the units used for purposes of the
average income set-aside test, and for
determining a building’s applicable fraction were part of a group of units within
the project whose average designated
imputed income limitations do not exceed
60 percent of AMGI. This limitation is
consistent with the requirement in section
42(g)(1)(C)(ii)(II). The annual reporting
requirements in §1.42-19T(c)(1) and (3)
and (d)(2) are also similar in substance
to other annual certifications required of
taxpayers. For example, minimum certifications by taxpayers are required in qualified allocation plans as provided in §1.425(c). The reporting requirements in these
final regulations also provide added flexibility by allowing the applicable Agency
to determine the time and manner that the
reporting is made under §1.42-19T(c)(2)
(i). Also, §1.42-19T(c)(4) gives Agencies
the ability to waive any failure of reporting on a case-by-case basis.
A summary of paperwork burden estimates follows:
Estimated number of respondents:
Approximately 200 taxpayers elected the
average income test for just over 2,000
buildings between 2018 and 2022. When
viewed annually, we project that approximately 100 additional taxpayers will have
eligible buildings and 1,000 additional
buildings will be eligible under the average income test.
Estimated burden per response: We
estimate that identifying which units are
for use in the average income set-aside
test and applicable fraction determinations and designating a unit’s imputed
income limitation takes an average of 15
minutes per unit. Based on an estimated
average of 15 units per building and an
average 15 minutes of time per unit, an
impacted taxpayer will incur an average
of 225 minutes per building to record the

October 31, 2022

additional designations due to the flexibility under the regulations for the average
income test. Total average annual burden
for recording the designations per building is 11,250 hours (15 units x 15 minutes
x 3,000 buildings).
Taxpayers are also required to report
redesignation of units, and why they are
required to redesignate units during the
year. For purposes of this analysis, we
assume that an average of 4 units per
building will be redesignated annually. We
estimate each redesignation will take an
average of 10 minutes. Thus, we estimate
the average number of minutes per year
to record redesignations for an impacted
taxpayer to be 40 minutes per building
for a total average annual burden of 2,000
hours (40 minutes x 3,000 buildings).
In addition, we estimate an annual
reporting burden related to the expanded
flexibility rules to average 20 minutes per
impacted taxpayer for a total burden of
100 hours (20 minutes x 300 taxpayers).
Estimated frequency of response:
Annual.
Estimated total burden hours: The
annual burden hours for this regulation
is estimated to be 13,350 hours. Using
a monetization rate of $50.69 per hour
(2020 dollars), the burden for this regulation is $676,712 for impacted taxpayers.
A Federal agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information displays a valid control number.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility
Act (RFA) (5 U.S.C. chapter 6), it is hereby
certified that this final regulation will not
have a significant economic impact on a
substantial number of small entities. This
certification is based on the fact that, prior
to the publication of this final regulation
and before the enactment of the 2018
Act, taxpayers were already required to
satisfy either the 20-50 test or the 40-60
test, as elected by the taxpayer, in order to
qualify as a low-income housing project.
The 2018 Act added a third minimum setaside test (the average income test) that
taxpayers may elect. This final regulation
sets forth requirements for the average
income test, and the costs associated with

October 31, 2022

the average income test are similar to the
costs associated with the 20-50 test and
40-60 test. In addition, affected taxpayers,
including some who end up not electing
the average income test will incur minimal costs in reading and understanding the
regulations. The Treasury Department and
the IRS estimate that the burden involved
in reading and understanding the regulations will be approximately 3 to 5 hours
and largely will be borne by advisors and
trade media. A portion of the cost to such
advisors and trade media will be passed on
to taxpayers.
As described in more detail in the
Paperwork Reduction Act section of this
preamble, approximately 200 taxpayers
elected the average income test between
2018 and 2022. When that figure is
viewed annually, the Treasury Department and the IRS project that approximately 100 additional taxpayers will
elect the average income test due to the
final regulations. For the 300 taxpayers
affected, the annual burden hours for this
regulation is estimated in the Paperwork
Reduction Act analysis to be 13,350
hours. Thus, the average annual burden
hours amount to 44.5 hours per affected
small entity. This estimate reflects all
recordkeeping and reporting requirements associated with the final regulations, including (i) identifying which
units are for use in the average income
set-aside test, (ii) identifying which units
are for use in applicable fraction determinations, (iii) designating a unit’s imputed
income limitation, (iv) reporting redesignation of units, (v) reporting reasons
why units are redesignated, and (vi) the
reporting burden related to the expanded
flexibility rules.
Monetized at $50.69 per hour (2020
dollars), the average annual burden hours
represent a cost of $2,256 per affected
small entity. This amount is likely quite
small relative to the entity’s revenue. A
precise estimate of typical revenue is not
possible with the data available to the
Treasury Department and the IRS. However, the Treasury Department and the IRS
estimate that the typical annual LIHTC
allocation to an affected entity is between
$125,000 and $1,450,000. Relative to
these sums, the $2,256 annual cost of the
regulations is not a significant economic
impact.

398

Accordingly, it is hereby certified that
these regulations will not have a significant economic impact on a substantial
number of small entities within the meaning of section 601(6) of the RFA.
For the applicability of the RFA to the
temporary regulations, refer to the Special
Analyses section of the preamble to the
notice of proposed rulemaking published
in the Proposed Rules section in this issue
of the Federal Register.
IV. Section 7805(f)
Pursuant to section 7805(f), the proposed regulation was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business, and no
comments were received. The Treasury
Department and the IRS also requested
comments from the public.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires that
agencies assess anticipated costs and benefits and take certain other actions before
issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or
tribal government, in the aggregate, or by
the private sector, of $100 million in 1995
dollars, updated annually for inflation. This
final rule does not include any Federal
mandate that may result in expenditures by
State, local, or tribal governments, or by the
private sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism)
prohibits an agency from publishing any
rule that has federalism implications if
the rule either imposes substantial, direct
compliance costs on State and local governments, and is not required by statute,
or preempts State law, unless the agency
meets the consultation and funding
requirements of section 6 of the Executive order. These regulations do not have
federalism implications and do not impose
substantial direct compliance costs on
State and local governments or preempt
State law within the meaning of the Executive order.

Bulletin No. 2022–44

VII. Congressional Review Act
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs designated this rule as not a “major rule,” as
defined by 5 U.S.C 804(2).
Drafting Information
The principal authors of these regulations are Dillon Taylor, Office of the
Associate Chief Counsel (Passthroughs
and Special Industries), and Michael J.
Torruella Costa, formerly at Office of the
Associate Chief Counsel (Passthroughs
and Special Industries). However, other
personnel from the Treasury Department and the IRS participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1‑‑INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding in numerical order entries for §§ 1.42-19 and 1.4219T to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.42-15 also issued under 26
U.S.C. 42(n);
*****
Section 1.42-19 also issued under 26
U.S.C. 42(n);
Section 1.42-19T also issued under 26
U.S.C. 42(n);
*****
Par. 2. Section 1.42-0 is amended by:
1. In the introductory text, removing
“1.42-18” and adding “1.42-19” in its
place.
2. In §1.42-15:
i. Revising paragraph (c).
ii. Adding paragraphs (c)(1) and (2)
and (c)(2)(i) through (iv).
iii. Revising paragraph (i).
iv. Adding paragraphs (i)(1) and (2).

Bulletin No. 2022–44

3. Adding a heading and entries for
§1.42-19.
The additions and revisions read as
follows:
§1.42-0 Table of contents.
*****
§1.42-15 Available unit rule.
*****
(c) Exceptions.
(1) In general.
(2) Rental of next available unit in case
of the average income test.
(i) Basic rule.
(ii) No requirement to comply with the
next available unit rule in a specific order.
(iii) Deep rent skewed projects.
(iv) Limitation.
*****
(i) Applicability dates.
(1) In general.
(2) Applicability dates under the average income test.
*****
§1.42-19 Average income test.
(a) Average income set-aside.
(b) Definition of low-income unit and
qualified group of units.
(1) Definition of low-income unit.
(2) Definition of qualified group of
units.
(3) Identification of qualified groups of
units.
(i) Average income set-aside test.
(ii) Applicable fraction determinations.
(iii) Identification of units.
(c) Procedures.
(1) [Reserved]
(2) [Reserved]
(3) Designation of imputed income
limitations.
(i) Timing of designation.
(ii) 10-percent increments.
(iii) Continuity.
(iv) [Reserved]
(4) [Reserved]
(d) Changing a unit’s designated
imputed income limitation.
(1) Permitted changes.
(i) Federally permitted changes.
(ii) Housing credit agency (Agency)-permitted changes.

399

(iii) Certain laws.
(iv) Tenant movement.
(v) Restoring compliance with average
income requirements.
(2) [Reserved]
(e) Examples.
(f) Applicability dates.
(1) General rule.
(2) Designations of occupied units.
(3) Applicability of this section to taxable years beginning before January 1,
2023.
Par. 3. Section 1.42-15 is amended by:
1. Revising the definition of Over-income unit in paragraph (a).
2. In paragraph (c):
i. Revising the heading.
ii. Designating the text as paragraph (c)
(1) and adding a heading for newly designated paragraph (c)(1).
3. Adding paragraph (c)(2).
4. In paragraph (i):
i. Revising the heading.
ii. Designating the text as paragraph (i)
(1).
5. In newly designated paragraph  (i)
(1):
i. Adding a heading.
ii. Removing “This section” and adding “Except for paragraph  (c)(2) of this
section, this section” in its place.
6. Adding paragraph (i)(2).
The revisions and additions read as
follows:
§1.42-15 Available unit rule.
(a) * * *
Over-income unit means, in the case
of a project with respect to which the
taxpayer elects the requirements of section 42(g)(1)(A) or (B) (that is, the 20–50
or 40–60 tests), a low-income unit in
which the aggregate income of the occupants of the unit increases above 140 percent of the applicable income limitation under section 42(g)(1)(A) and (B),
or above 170 percent of the applicable
income limitation for deep rent skewed
projects described in section 142(d)(4)
(B). In the case of a project with respect
to which the taxpayer elects the requirements of section 42(g)(1)(C) (that is, the
average income test), over-income unit
means a residential unit described in
§1.42-19(b)(1)(i) through (iii) in which
the aggregate income of the occupants of

October 31, 2022

the unit increases above 140 percent (170
percent in case of deep rent skewed projects described in section 142(d)(4)(B)) of
the greater of 60  percent of area median
gross income or the imputed income limitation designated with respect to the unit
under §1.42-19(b).
*****
(c) Exceptions—(1) In general. * * *
(2) Rental of next available unit in
case of the average income test—(i) Basic
rule. In the case of a project with respect
to which the taxpayer elects the average
income test, if a unit becomes an over-income unit within the meaning of paragraph (a) of this section, that unit ceases
to be described in §1.42-19(b)(1)(ii) if—
(A) Any residential rental unit (of a
size comparable to, or smaller than, the
over-income unit) is available, or subsequently becomes available, in the same
low-income building; and
(B) That available unit is occupied by
a new resident whose income exceeds the
limitation described in paragraph (c)(2)
(iv) of this section.
(ii) No requirement to comply with the
next available unit rule in a specific order.
Where multiple units in a building are
over-income units at the same time—
(A) The order in which available units
are occupied makes no difference for
purposes of complying with the rules
in this section (next available unit
rule); and
(B) In making imputed income limitation
designations, the taxpayer must take
into account the limitations described
in paragraphs (c)(2)(iii) and (iv) of
this section.
(iii) Deep rent skewed projects. In
the case of a project described in section
142(d)(4)(B) with respect to which the
taxpayer elects the average income test, if
a unit becomes an over-income unit within
the meaning of paragraph (a) of this section, that unit ceases to be a unit described
in §1.42-19(b)(1)(ii) if—
(A) Any residential unit described in
§1.42-19(b)(1)(i) through (iii) is available,
or subsequently becomes available, in the
same low-income building; and
(B) That unit is occupied by a new resident whose income exceeds the lesser of
40 percent of area median gross income or
the imputed income limitation designated
with respect to that unit.

October 31, 2022

(iv) Limitation. The limitation
described in this paragraph (c)(2)(iv) is—
(A) In the case of a unit that was
described in §1.42-19(b)(1)(i) through
(iii) prior to becoming vacant, the imputed
income limitation designated with respect
to the available unit for the average
income test under §1.42-19(b); and
(B) In the case of any other unit, the
highest imputed income limitation that
could be designated (consistent with section 42(g)(1)(C)(ii)(III)) for that available
unit under §1.42-19(c) such that the average of all imputed income designations
of residential units in the project does not
exceed 60  percent of area median gross
income (AMGI).
(v) Example. The operation of paragraph  (c)(2) of this section (that is, the
next available unit rule for the average
income test) is illustrated by the following
example.
(A) Facts. (1) A single-building housing project received an allocation of housing credit dollar
amount for 10 low-income units. The taxpayer who
owns the project constructs the building with 10
identically sized units and elects the average income
test. In the first year, the taxpayer intended to have
8 units that will qualify as low-income units (within
the meaning of §1.42-19(b)(1)), and 2 units that are
market-rate units. The taxpayer properly and timely
designates the imputed income limitations for the 8
units as follows: 4 units at 80 percent of AMGI; and
4 units at 40 percent of AMGI.
Table 1 to Paragraph (c)(2)(v)(A)(1)

those designations, Unit #10 was occupied by a new
income-qualified tenant, and then later, Unit #5 was
occupied by a new income-qualified resident.
(B) Analysis. Taxpayer sought to maintain the
status of the over-income units (Unit #1 and Unit #6)
as units described in §1.42-19(b)(1)(ii). As the
then-market rate units (Units ##5 and 10) became
available to rent, Taxpayer designated imputed
income limitations for them at 40 percent and 80 percent of AMGI, respectively. Immediately after each
designation, the average of the designations in the
project does not exceed 60 percent AMGI. Pursuant to the rule in paragraph (c)(2)(ii) of this section,
when there are multiple over-income units, Taxpayer
is not required to rent the next-available units in a
specific order, even though they may have different
imputed income limitations. Thus, Taxpayer complied with the rules of the next available unit rule,
and Unit #1 and Unit #6 maintain status as units
described in §1.42-19(b)(1)(ii).

*****
(i) Applicability dates—(1) In general.
* * *
(2) Applicability dates under the average income test. The requirements of
the second sentence of the definition of
over-income unit in paragraph (a) of this
section and paragraph (c)(2) of this section apply to taxable years beginning
after December 31, 2022. A taxpayer may
choose to apply this section to a taxable
year beginning after October 12, 2022,
and before January 1, 2023, provided that
the taxpayer chooses to apply §1.42-19 to
the same taxable year.
Par. 4. Section 1.42-19 is added to read
as follows:

Imputed Income Limitation of
the Unit

§1.42-19 Average income test.

1

80 percent of AMGI

2

80 percent of AMGI

3

80 percent of AMGI

4

80 percent of AMGI

5

Market Rate

6

40 percent of AMGI

7

40 percent of AMGI

8

40 percent of AMGI

9

40 percent of AMGI

10

Market Rate

(a) Average income set-aside. A project
for residential rental property satisfies the
average income test in section 42(g)(1)(C)
for a taxable year if the project contains a
qualified group of units (within the meaning of paragraph (b)(2) of this section) that
constitutes 40 percent or more of the residential units in the project. (In the case
of a project described in section 142(d)(6),
“40 percent” in the preceding sentence is
replaced with “25 percent.”)
(b) Definition of low-income unit and
qualified group of units—(1) Definition
of low-income unit.  For purposes of this
section, a residential unit is a low-income
unit if and only if–
(i) Such unit is rent-restricted (as
defined in section 42(g)(2));
(ii) The individuals occupying such
unit satisfy the imputed income limitation

Unit Number

(2) In the first taxable year of the credit period
(Year 1), the project is fully leased and occupied by
income-qualified residents in Units ##1-4 and 6-9.
In Year 2, Unit #1 and Unit #6 become over-income.
The tenant residing in Unit #5 vacated that unit.
Taxpayer then designated an imputed income limitation of 40 percent of AMGI for Unit #5. Later in
Year 2, the tenant residing in Unit #10 vacated that
unit. Taxpayer designated an imputed income limitation of 80 percent of AMGI for Unit #10. After

400

Bulletin No. 2022–44

of that unit designated by the taxpayer in
accordance with paragraphs (c)(3) and (d)
of this section and with §1.42-19T(c) and
(d), or the unit meets the requirements
under section 42(g)(2)(D);
(iii) No provision in section 42 (including section 42(i)(3)(B)-(E)) or in the regulations under section 42 denies low-income status to that unit; and
(iv) The unit is part of a qualified group
of units under paragraph (b)(2) of this
section.
(2) Definition of qualified group of
units. A group of residential units is a
qualified group of units for a taxable year
if and only if—
(i) Each unit in the group satisfies
the requirements of paragraphs (b)(1)(i)
through (iii) of this section; and
(ii) The average of the imputed income
limitations of all of the units in the group
does not exceed 60 percent of area median
gross income (AMGI).
(3) Identification of qualified groups
of units—(i) Average income set-aside
test. For each taxable year in the extended
use period, the taxpayer must identify a
qualified group of units that constitute 40
percent or more of the residential units in
the project. The requirements in paragraph
(b)(3)(iii) of this section apply to these
identifications.
(ii) Applicable fraction determinations.
For each taxable year in the extended use
period, the taxpayer must identify a qualified group of units to be used in determining the applicable fractions for the buildings in the project.
(A) Identification of the units in the
qualified group of units used for determining applicable fractions. The residential units that are identified for purposes
of this paragraph (b)(3)(ii) include the
units that, under paragraph (b)(3)(i) of
this section, are included in the qualified
group of units identified for purposes of
the set-aside qualification of the project.
The taxpayer may identify additional units
for inclusion in the group of units used in
determining the applicable fractions for
buildings in the project provided that the
resulting group is a qualified group of
units within the meaning of paragraph (b)
(2) of this section.
(B) Computing applicable fractions of
buildings. For a taxable year, the applicable fraction of a building in a project is

Bulletin No. 2022–44

computed using the units that are in the
particular building and that are also in
the qualified group of units for the project
identified for purposes of this paragraph
(b)(3)(ii). The units included in the applicable fraction of a building do not have
to be a qualified group of units on their
own. See Example 4 of paragraph (e) of
this section.
(iii) Identification of units. The recordkeeping and reporting requirements in
§1.42-19T(c)(1) apply both to the identification of units that is required by paragraph (b)(3)(i) of this section and the
identification of units that is described in
paragraph (b)(3)(ii) of this section.
(c) Procedures. (1) - (2) [Reserved]
(3) Designation of imputed income limitations—(i) Timing of designation. (A)
Before a unit is first occupied as a low-income unit, or, except as provided in paragraph (c)(3)(i)(B) of this section, is first
occupied under a changed income limit,
the taxpayer must designate the unit’s
imputed income limitation or changed
imputed income limitation.
(B) For an occupied unit that is subject
to a change in imputed income limitation
pursuant to paragraph (d) of this section,
the taxpayer must designate the unit’s
changed imputed income limitation not
later than the end of the taxable year in
which the change occurs.
(ii) 10-percent increments. Under section 42(g)(1)(C)(ii)(III), a designation is
valid only if it is one of the following: 20
percent, 30 percent, 40 percent, 50 percent, 60 percent, 70 percent, or 80 percent
of AMGI.
(iii) Continuity. Except as provided in
paragraph (d) of this section, the imputed
income limitation of a residential unit
does not change.
(iv) [Reserved]
(4) [Reserved]
(d) Changing a unit’s designated
imputed income limitation—(1) Permitted
changes. Notwithstanding paragraph (c)
(3)(iii) of this section, the taxpayer may
change the imputed income limitation of
a unit in the following circumstances subject to the timing of designation requirement in paragraph (c)(3)(i)(B) of this
section.
(i) Federally permitted changes. Permission for the change is contained in IRS
forms, instructions, or guidance published

401

in the Internal Revenue Bulletin pursuant
to §601.601(d)(2)(ii)(b) of this chapter.
(ii) Housing credit agency (Agency)-permitted changes. The Agency with
jurisdiction of the project has issued public
written guidance that provides conditions
for a permitted change and that applies to
all average income test projects under the
jurisdiction of the Agency.
(iii) Certain laws. The change in designation is required or appropriate to
enhance protections contained in the following, as amended—
(A) The Americans with Disabilities
Act of 1990 (ADA), Pub. L. 101-336, 104
Stat. 328, 42 U.S.C. 12101, et seq.;
(B) The Fair Housing Amendments Act
of 1988, Pub. L. 100-430, 102 Stat.1619,
42 U.S.C. 3601, et seq.;
(C) The Violence Against Women Act
of 1994, Pub. L. 103-322, 108 Stat. 1902,
34 U.S.C. 12291, et seq.;
(D) The Rehabilitation Act of 1973,
Pub. L. 93-112, 87 Stat. 394, 29 U.S.C.
701, et seq.; or
(E) Any other State, Federal, or local
law or program that protects tenants and
that is identified pursuant to paragraph (d)
(1)(i) or (ii) of this section.
(iv) Tenant movement. If a current
income-qualified tenant moves to a different unit in the project –
(A) The unit to which the tenant moves
has its imputed income designation, if any,
changed to the limitation of the unit from
which the tenant is moving; and
(B) The vacated unit takes on the prior
limitation, if any, of the tenant’s new unit.
(v) Restoring compliance with average income requirements. If one or more
units lose low-income status or if there is
a change in the imputed income limitation
of some unit and if either event would
cause a previously qualifying group of
units to cease to be described in paragraph
(b)(2)(ii) of this section, then the taxpayer
may designate an imputed income limitation for a market-rate unit or may reduce
the existing imputed income limitations
of one or more other units in the project
in order to restore compliance with the
average income requirement. The rule in
this paragraph (d)(1)(v) may be applied to
market-rate, vacant, or low-income units,
but, in the case of occupied units, the current tenants must qualify under the new,
lower imputed income limitation.

October 31, 2022

(2) [Reserved]
(e) Examples. The operation of this
section is illustrated by the following
examples.

(1) Example 1—(i) Facts. (A) A single-building
housing project received an allocation of housing
credit dollar amount. The taxpayer who owns the
project elects the average income test, intending for
the 10-unit building to have 100 percent low-income
occupancy. The taxpayer properly and timely designates the imputed income limitations for the 10 units
as follows: 5 units at 80 percent of AMGI; and 5
units at 40 percent of AMGI. Also, for the first credit
year, the taxpayer follows proper procedure in identifying 4 units as the qualified group of units that are
to be used for qualifying under the average income
set-aside (Units ##1, 2, 6, and 7). Additionally, for
the first credit year, the taxpayer follows proper
procedure in identifying all 10 units as the qualified
group of units that are to be used for the applicable
fraction determination. All of the units in the project
are described in paragraphs (b)(1)(i) through (iii) of
this section.
Table 1 to Paragraph (e)(1)(i)(A)
Unit
Number

Imputed Income Limitation of
the Unit

1

80 percent of AMGI

2

80 percent of AMGI

3

80 percent of AMGI

4

80 percent of AMGI

5

80 percent of AMGI

6

40 percent of AMGI

7

40 percent of AMGI

8

40 percent of AMGI

9

40 percent of AMGI

10

40 percent of AMGI

(B) In the first taxable year of the credit period
(Year 1), the project is fully leased and occupied.
(ii) Analysis. The identified groups are qualified
groups under paragraph (b)(2) of this section. All
units in both of the groups are described in paragraphs (b)(1)(i) through (iii) of this section, and the
averages of the imputed income limitations of both
the 4-unit group (Units ##1, 2, 6, and 7) and the
10-unit group do not exceed 60 percent of AMGI.
(A) Average income set-aside. The project qualifies under the average income set-aside because the
identified group of 4 units (Units ##1, 2, 6, and 7) is
a qualified group of units that comprise at least 40%
of the residential units in the project.
(B) Qualified basis. All 10 units in the identified
qualified group of units are used in the applicable
fraction determination when calculating qualified
basis for purposes of determining the annual credit
amount under section 42(a).
(2) Example 2—(i) Facts. Assume the same
facts as Example 1 of paragraph (e)(1) of this section. In Year 2, Unit #6 (which has a designated
imputed income limitation of 40 percent of AMGI)
becomes uninhabitable. Repair work on Unit #6 is
completed in Year 3. For Year 2, Taxpayer identifies

October 31, 2022

the following as a qualified group of units that are to
be used for both the set-aside requirement and the
applicable fraction determination: Units ##1–4 and
7–10. For Year 3, Taxpayer identifies all 10 units as
the qualified group of units that are to be used for
the set-aside requirement and the applicable fraction
determination.
(ii) Analysis. For Year 2, the identified group is
a qualified group under paragraph (b)(2) of this section. All 8 units in the group are described in paragraphs (b)(1)(i) through (iii) of this section, and the
average of the imputed income limitations of the 8
units in the group of units does not exceed 60 percent
of AMGI.
(A) Average income set-aside. For Year 2, the
project qualifies for the average income set-aside
because the project contains a qualified group of
units that comprises at least 40% of the residential
units in the project.
(B) Qualified basis. To determine qualified basis
in Year 2, the 8 units in the identified qualified group
of units are used in the applicable fraction determination when calculating qualified basis for purposes
of determining the annual credit amount under section 42(a). Unit #6 could not have been identified in
the qualified group of units for use in the applicable
fraction determination because its lack of habitability prevents it from being a low-income unit. Further,
Taxpayer could not have identified all 9 of the habitable units to be used in the qualified group of units
for the applicable fraction determination because the
average of imputed income limitations of those 9
exceeds 60 percent of AMGI. Taxpayer had a choice
of which of Units ##1–5 it was going to not identify for use in the applicable fraction determination.
Omitting any one of them reduces the average limitation of the remaining group of 8 units to an amount
that does not exceed 60 percent of AMGI. Given
taxpayer’s decision to leave out Unit #5, Units ##1,
2, 3, 4, 7, 8, 9, and 10 are taken into account in the
applicable fraction.
(C) Recapture. At the close of Year 2, Unit #6’s
unsuitability for occupancy precludes it from being
described in paragraph (b)(1)(iii) of this section.
Unit #6’s resulting failure to be a low-income unit
prevents it from being in a qualified group for purposes of computing the applicable fraction. The
decline in the applicable fraction yields a decline
in qualified basis, which results in credit recapture
under section 42(j) for Year 2. Additionally, Unit #5
is not a low-income unit because the taxpayer did not
include it in the qualified group of units identified
for determining the building’s applicable fraction.
The exclusion of Unit #5 from the qualified group of
units further reduces the applicable fraction for Year
2 and so reduces qualified basis for that year as well.
Thus, this exclusion increases the credit recapture
amount under section 42(j).
(D) Restoration of habitability and of qualified
basis. As described in the facts in paragraph (e)(2)
(i) of this section, in Year 3, after repair work is complete, the formerly uninhabitable Unit  #6 is again
occupied by a qualified tenant at the same imputed
income limitation, and the Taxpayer identifies all 10
units as the qualified group of units that are to be used
for the set-aside requirement and the applicable fraction determination. The identified group is a qualified group under paragraph (b)(2) of this section. All

402

10 units in the group are described in paragraphs (b)
(1)(i) through (iii) of this section, and the average of
the imputed income limitations of the 10 units in the
group of units does not exceed 60 percent of AMGI.
For Year 3, all 10 units are included in the qualified
group of units for purposes of the average income
set-aside test and are a qualified group of units for the
applicable fraction determination.
(3) Example 3—(i) Facts. Assume the same
facts as Example 2 of paragraph (e)(2) of this section, except that the income for the tenant residing
in Unit #5 has declined so that tenant’s income does
not exceed 60 percent of AMGI. For Year 2, taxpayer
timely redesignates Unit #5 pursuant to the rule in
paragraph (d)(1)(v) of this section so that the imputed
income limitation is 60 percent of AMGI instead of
80 percent of AMGI. Taxpayer also makes revisions
so that Unit #5 is rent-restricted under the redesignated imputed income limitation. Taxpayer identifies
9 units (Units ##1–5 and 7–10) as the qualified group
of units that are to be used for the set-aside requirement and the applicable fraction determination.
Table 2 to Paragraph (e)(3)(i)
Unit Number

Imputed Income Limitation
of the Unit

1

80 percent of AMGI

2

80 percent of AMGI

3

80 percent of AMGI

4

80 percent of AMGI

5

60 percent of AMGI

6

40 percent of AMGI

7

40 percent of AMGI

8

40 percent of AMGI

9

40 percent of AMGI

10

40 percent of AMGI

(ii) Analysis. For Year 2, the identified group is
a qualified group under paragraph (b)(2) of this section. All 9 units in the group are described in paragraphs (b)(1)(i) through (iii) of this section, and the
average of the imputed income limitations of the 9
units in the group of units does not exceed 60 percent
of AMGI.
(A) Average income set-aside. For Year 2, project
contains a qualified group of units that comprises at
least 40% of the residential units in the project.
(B)  Qualified basis. To determine qualified
basis, all 9 units in the identified qualified group of
units are used in the applicable fraction determination when calculating qualified basis for purposes
of determining the annual credit amount under
section 42(a). Unit #6 could not have been identified in the qualified group of units for use in the
applicable fraction determination because its lack
of habitability prevents it from being a low-income
unit. Thus, Units ##1, 2, 3, 4, 5, 7, 8, 9, and 10
are taken into account in the applicable fraction
determination.
(C) Recapture. At the close of Year 2, the amount
of the qualified basis is less than the amount of
the qualified basis at the close of Year  1, because
Unit  #6’s unsuitability for occupancy prohibits

Bulletin No. 2022–44

it from being a low-income unit. Unit #6’s failure
to be a low-income unit results in a credit recapture amount under section  42(j) for Year 2 related
to Unit  #6. Because Units ##1–5 and 7–10 are all
included in the qualified group of units for use in the
applicable fraction determination, Units ##1–5 and
7–10 are included in qualified basis for Year 2 when
determining the recapture amount.
(4) Example 4—(i) Facts. (A) A multiple-building housing project consisting of two buildings
received an allocation of housing credit dollar
amount, and the taxpayer who owns the project
elects the average income test. The taxpayer intends
for the buildings (each containing 5 units) to have
100 percent low-income occupancy. The taxpayer
properly and timely designates the imputed income
limitations for the 10 units in Buildings 1 and 2 as
follows: Building A contains 2 units at 80 percent of
AMGI and 3 units at 40 percent of AMGI; and Building B contains 2 units at 40 percent of AMGI and 3
units at 80 percent of AMGI.
Table 3 to Paragraph (e)(4)(i)(A)
Building A,
Unit Number

Imputed Income
Limitation of the Unit

A1

80 percent of AMGI

A2

80 percent of AMGI

A3

40 percent of AMGI

A4

40 percent of AMGI

A5

40 percent of AMGI

Building B,
Unit Number
B1

40 percent of AMGI

B2

40 percent of AMGI

B3

80 percent of AMGI

B4

80 percent of AMGI

B5

80 percent of AMGI

(B) In the first taxable year of the credit period
(Year 1), the project is fully leased and occupied.
Also, for the first credit year, the taxpayer follows
proper procedure in identifying all 10 units as a qualified group of units for the minimum set-aside and
the applicable fraction determination.
(ii) Analysis. For Year 1, the identified group is
a qualified group under paragraph (b)(2) of this section. All 10 units in the group are described in paragraphs (b)(1)(i) through (iii) of this section, and the
average of the imputed income limitations of the 10
units in the group of units does not exceed 60 percent
of AMGI.
(A) Average income test. The multiple-building
project meets the average income test as the project
contains a qualified group of units that comprises
at least 40% of the residential units in the project.
The fact that the average of the income limitations of
the units in Building B exceeds 60 percent of AMGI
does not impact this result.
(B) Qualified basis. To determine qualified
basis, all 10 units in the identified qualified group of
units across Building A and Building B are used in
the applicable fraction determination when calculating qualified basis of each building for purposes

Bulletin No. 2022–44

of determining the annual credit amount under section 42(a). The fact that the average of the units
in Building B exceeds 60 percent of AMGI does
not impact the applicable fraction of Building B
because the average of the identified group of units
across both buildings does not exceed 60 percent
of AMGI.
(5) Example 5—(i) Facts. A single-building
housing project received an allocation of housing
credit dollar amount, and the taxpayer who owns the
project elects the average income test. During Year
2 of the credit period, the tenant residing in a unit
with a designated imputed income limitation of 40
percent of AMGI moves to a market-rate unit within
the same project. The tenant’s income continues to
be at or below 40 percent of AMGI.
(ii) Analysis. Under the rule in paragraph (d)(1)
(iv) of this section, when the current income-qualified tenant moves to a different unit in the project,
the unit to which the tenant moves is eligible for
the taxpayer to designate as a unit with a designated
imputed income limitation of 40 percent of AMGI.
If the taxpayer makes those designations, the unit
vacated by the tenant takes on the prior limitation,
if any, of the tenant’s new unit. In this situation, the
vacated unit formerly occupied by the tenant is now
a market-rate unit.
(6) Example 6—(i) Facts. A single-building
housing project received an allocation of housing
credit dollar amount, and the taxpayer who owns the
project elects the average income test. During Year
2 of the credit period, the disability status under the
ADA of a tenant changes, and therefore under the
provisions of the ADA, the tenant now needs to
reside in a different unit with different accommodations. The tenant currently resides in a unit with
a designated imputed income limitation of 40 percent of AMGI. A unit that would meet the tenant’s
needs is available on the first-floor of the building,
but it was previously a low-income unit with a designated imputed income limitation of 70 percent of
AMGI and thus a higher maximum gross rent than
the tenant’s current unit. The tenant moves to the
first-floor unit.
(ii) Analysis. The tenant’s move was required
under the ADA. Accordingly, the taxpayer is permitted to change the designation of the imputed income
limitation of the first-floor unit so that the unit’s designation is 40 percent of AMGI. Under paragraph
(d)(1)(iv) of this section, the vacated unit takes on
the prior limitation of 70 percent of AMGI of the
tenant’s new unit.
(f) Applicability dates–(1) In general. Except as
provided in paragraph (f)(3) of this section, this section applies to taxable years beginning after December 31, 2022.
(2) Designations of occupied units. (i) If a residential unit is occupied at the end of the most recent
taxable year ending before the first taxable year to
which this section applies and if the unit is to be
taken into account as a low-income unit under this
section as of the beginning of the first taxable year to
which this section applies, then not later than the first
day of such first taxable year, the taxpayer must designate an imputed income limitation for the unit. The
first taxable year to which this section applies means
the first taxable year beginning after December 31,
2022, if paragraph (f)(1) of this section applies, or

403

the taxable year described in paragraph (f)(3) of this
section if the taxpayer chooses to apply paragraph (f)
(3) of this section.
(ii) The designation required by paragraph (f)(2)
(i) of this section must comply with paragraph (c)(3)
(ii) of this section and §1.42-19T(c)(3)(iv), without
taking into account §1.42-19T(c)(4). Section 1.4219T(c)(2) applies to these designations, except that
the Agency may allow the notification to be made
along with any other notifications for the first taxable
year beginning after December 31, 2022.
(iii) The designated imputed income limitation
for the unit may not be less than the income that the
current occupant of the unit had when that occupancy began.
(3) Applicability of this section to taxable years
beginning before January 1, 2023. A taxpayer may
choose to apply this section to a taxable year beginning after October 12, 2022, and before January 1,
2023, provided that the taxpayer chooses to apply
§1.42-15 to the same taxable year.
Par. 5. Section 1.42-19T is added to read as
follows:
§1.42-19T Average income test (temporary).
(a) - (b) [Reserved]
(c) Procedures—(1) Identification of low-income
units for use in the average income set-aside test or
the applicable fraction determination—(i) In general. For a taxable year, a taxpayer must follow the
procedures described in paragraph (c)(1)(ii) of this
section to identify—
(A) A qualified group of units that satisfy the
average income set-aside test; and
(B) A qualified group of units used to determine
the applicable fraction.
(ii) Recording and communicating. The procedures described in this paragraph (c)(1)(ii) are—
(A) Recording the identification in its books and
records, where the identification must be retained for
a period not shorter than the record retention requirement under §1.42-5(b)(2); and
(B) Communicating the annual identifications
to the applicable housing credit agency (Agency) as
provided in paragraph (c)(2) of this section.
(2) Notifications to the Agency with jurisdiction
over a project—(i) Agency flexibility. An Agency
may establish the time and manner in which information is annually provided to it.
(ii) Example. An Agency may allow a taxpayer
to describe a current year’s information by reporting
differences from the previous year’s information or
by reporting that there are no such differences. Various Agencies may choose to apply this manner of
reporting to the identity of a qualified group of units
for use in the average income set-aside or applicable
fraction determination, or the imputed income limits
designated for the various units in a project.
(3) Designation of imputed income limitations.
(i) - (iii) [Reserved]
(iv) Recording, retention, and annual communications related to designations. A taxpayer designates a unit’s imputed income limitation by recording the limitation in its books and records, where it
must be retained for a period not shorter than the
record retention requirement under §1.42-5(b)(2).
The preceding sentence applies both to units whose

October 31, 2022

first occupancy is as a low-income unit and to previously market-rate units that are converted to low-income status. The designation must also be communicated annually to the applicable Agency as provided
in paragraph (c)(2) of this section.
(4) Waiver for failure to comply with procedural
requirements. On a case-by-case basis, the Agency
has the discretion to waive in writing any failure to
comply with the requirements of paragraph (c)(1) or
(2) or (c)(3)(iv) of this section up to 180 days after
discovery of the failure, whether by taxpayer or
Agency. If an Agency exercises this discretion, then
the relevant requirements are treated as having been
satisfied. In such a case, the tax consequences under
this section correspond to that deemed satisfaction.
(d) Changing a unit’s designated imputed income
limitation. (1) [Reserved]
(2) Process for changing a unit’s designated
imputed income limitation. The taxpayer effects
a change in a unit’s imputed income limitation by
recording the limitation in its books and records,
where it must be retained for a period not shorter
than the record retention requirement under §1.425(b)(2). The new designation must also be communicated to the applicable Agency as provided in
paragraph (c)(2) of this section and must become
part of the annual report to the Agency of income
designations. The prior designation must be retained
in the books and records for the period specified in
paragraph (c)(3)(iv) of this section. A designation

October 31, 2022

under this paragraph (d)(2) is considered to be made
in a manner consistent with paragraph (c)(3) of this
section.
(e) [Reserved]
(f) Applicability dates–(1) In general. Except as
provided in paragraph (f)(3) of this section, this section applies to taxable years beginning after December 31, 2022.
(2) Designations of occupied units. (i) If a residential unit is occupied at the end of the most recent
taxable year ending before the first taxable year to
which this section applies and if the unit is to be
taken into account as a low-income unit under this
section as of the beginning of the first taxable year to
which this section applies, then not later than the first
day of such first taxable year, the taxpayer must designate an imputed income limitation for the unit. The
first taxable year to which this section applies means
the first taxable year beginning after December 31,
2022, if paragraph (f)(1) of this section applies, or
the taxable year described in paragraph (f)(3) of this
section if the taxpayer chooses to apply paragraph (f)
(3) of this section.
(ii) The designation required by paragraph (f)(2)
(i) of this section must comply with §1.42-19(c)(3)
(ii) and paragraph (c)(3)(iv) of this section, without
taking into account paragraph (c)(4) of this section.
Paragraph (c)(2) of this section applies to these designations, except that the Agency may allow the notification to be made along with any other notifications

404

for the first taxable year beginning after December
31, 2022.
(iii) The designated imputed income limitation
for the unit may not be less than the income that the
current occupant of the unit had when that occupancy began.
(3) Applicability of this section to taxable years
beginning before January 1, 2023. A taxpayer may
choose to apply this section to a taxable year beginning after October 12, 2022, and before January 1,
2023, provided that the taxpayer chooses to apply
§1.42-15 to the same taxable year.
(4) Expiration date. The applicability of this section expires on October 7, 2025.

Paul J. Mamo,
Assistant Deputy Commissioner for
Services and Enforcement.
Approved: September 30, 2022.
Lily L. Batchelder,
Assistant Secretary (Tax Policy).
(Filed by the Office of the Federal Register on October 7, 2022, 11:15 a.m., and published in the issue of
the Federal Register for October 12, 2022, 87 F.R.
61489)

Bulletin No. 2022–44