Exchanging a Section 8 or LIHTC Property

A voucher tenant's subsidy follows the sale only with the housing agency's written consent

Under the Housing Choice Voucher program the housing agency pays part of the rent under a housing assistance payments contract with the owner. Part B of that contract, form HUD-52641, says the owner "may not assign the HAP contract to a new owner without the prior written consent of the PHA."

The same clause bars assignment to a new owner who is debarred or suspended, or who is the parent, child, grandparent, grandchild, sister or brother of a member of the assisted family, unless the agency approves it as a reasonable accommodation. It also lets the agency refuse a buyer with a history of program violations.

Build the consent into the contract timeline. Your 45-day and 180-day periods start at transfer under Reg. section 1.1031(k)-1(b)(2), so a slow approval delays closing rather than shortening your exchange, but a buyer who cannot be approved is a buyer you lose.

Project-based Section 8 and HUD-insured buildings add a federal review of the buyer

Larger buildings with project-based Section 8 contracts, HUD-insured mortgages or HUD use agreements are covered projects under 24 CFR 200.214. Under 24 CFR 200.218, a request for consent to assign a Section 8 housing assistance payment contract is a triggering event for review of the buyer's controlling participants.

That review looks at the buyer's past performance in HUD programs. For you, it means the purchaser pool is limited to owners who can pass it, and the closing date depends on a federal approval you do not control. Many owners line up replacement candidates early but do not sign on the replacement side until the approval is in hand.

A tax-credit building sells with its covenant, and recapture depends on what the buyer will do

Under section 42(i)(1), the compliance period is 15 taxable years from the first year of the credit period. Section 42(h)(6) requires an extended low-income housing commitment lasting at least 15 years after that, which must be "binding on all successors of the taxpayer" and recorded as a restrictive covenant. Every buyer takes the building subject to it, and the price reflects restricted rents.

Recapture under section 42(j) is triggered when qualified basis drops during the compliance period. Section 42(j)(6) adds that the increase in tax "shall not apply solely by reason of the disposition of a building" if it is reasonably expected the building will keep operating as a qualified low-income building for the rest of the compliance period, and keeps the assessment period open for three years after the IRS is notified of any later reduction.

The extended use period can end early in limited cases. Under section 42(h)(6)(E) and (I), after the 14th year of the compliance period the owner may ask the housing credit agency to find a buyer, and if the agency cannot present a qualified contract within one year the period terminates, although existing low-income tenants keep protection from eviction without good cause and from rent increases for three more years.

The IRS describes Form 8611 as the form for recapture when qualified basis decreased or a building was disposed of and the procedures that would have prevented recapture were not followed. Your CPA should confirm the buyer's commitment and the filing position before closing.

Credit investors usually hold partnership interests, and those cannot be exchanged

Most tax-credit buildings are owned by a partnership with a general partner and one or more investor partners. Reg. section 1.1031(a)-3(a)(5) lists interests in a partnership among intangibles that are not real property for section 1031, unless the partnership has elected out of subchapter K.

So the exchange, if there is one, happens at the partnership level: the partnership sells the building and buys replacement property. A partner who wants a separate result must restructure before the sale, which drop-and-swap strategies covers along with its risks.

Worked example: a fourplex with two voucher tenants

These are hypothetical round numbers. An owner sells a fourplex for $800,000, two units leased to voucher holders. The buyer applies to the housing agency for consent to assignment of both HAP contracts, and the purchase contract makes approval a closing condition.

Approval takes longer than planned and closing slips five weeks. Because the identification period runs from the transfer, the owner loses no exchange time, and identifies replacements within 45 days of the actual closing.

If the buyer had been the brother of one voucher tenant, the HAP contract clause would block assignment of that contract without the agency's accommodation finding, and the owner would need another buyer. Run your own numbers and timeline with your CPA and attorney.

Buying assisted housing as replacement property costs you the acquisition credit on carried-over basis

An existing building can earn the section 42 acquisition credit only if it is acquired by purchase, at least 10 years after it was last placed in service, and under section 42(d)(2)(C) its eligible basis "shall not include so much of the basis of such building as is determined by reference to the basis of other property held at any time by the person acquiring the building." Basis carried over from your relinquished property under section 1031(d) is that kind of basis.

If you want income from housing without running a regulated property yourself, Delaware statutory trusts hold a range of residential asset classes; DST asset classes explains what to look for, and the offering documents must disclose any regulatory agreement or HAP contract renewal risk. Our traditional DST exchange solutions describe how those interests are placed.