First Year Records for LIHTC
In a recent student query, it was brought to our attention that there is still quite a bit of confusion about first year records for tax credit properties. For the particular situation in question, the manager had just begun to have tenants move out from tax credit units after having qualified them in year one. Knowing the importance of those first year tenant files and already having a copy of them (as always recommended), she was wondering if it would be okay to keep the original file contents and the copy together in storage. The short answer to this question is no. If you are interested in the full explanation please keep reading.
First year records, meaning the tenant files from the first occupants of tax credit units, are vitally important to the validity of a tax credit property. Within those files, it can be proven that the tenants who first occupy the units are indeed qualified based on the Section 42 regulations which primarily focus on income and student status eligibility. They should contain a completed application with appropriate signatures and dates, income and asset verifications as appropriate, and a thoroughly completed Tenant Income Certification (TIC) that has been signed by all adult members of the household as well as the manager. In addition, there should be a valid lease which covers at least six months of occupancy.
There are several key measurements that are taken throughout the life of a LIHTC property. Most importantly is the first time they are officially recorded which is at the end of the first year of the credit period on IRS Form 8609 when the property owners file to begin claiming the tax credits with their tax returns. By this point in time, the property (and in some cases the building) must have met its minimum set-aside as indicated in the application that was made for credits and each building should have achieved its targeted applicable fraction. These measurements dictate when and if credits may be claimed and in what amount. The first qualified tenant household that occupies a tax credit unit after it has been placed in service qualifies the unit for credits. Without the first year tenant files in tact, it cannot be proven that the units were actually qualified which therefore negates the first year measurements.
So, back to the original issue the student asked about – keeping original tenant files and copies together for storage purposes. First of all, common sense tells us that if they are filed together then there is no real reason for a copy, right? And secondly, if something were to happen to destroy the files (e.g. fire or flooding), then they could both be lost in one fell swoop. The Section 42 regulations require that those records be retained and available for six years after the last year of the compliance period, meaning at least 21 years for the purpose of IRS compliance. Most state agencies also require owners to retain duplicate copies of these tenant files that are kept in fire-proof file cabinets under lock and key. Some will accept electronic copies and others will not.
The importance of the first year records cannot be stressed enough. Managers should treat them as if they are made of solid gold, because in essence they validate millions of investment dollars and the very valuable tax credits that accompany them. Special care should be taken to preserve them in the best possible manner. The long answer to our student’s question may be summarized by saying yes, copies should be kept separately from the originals.