IRS Guidance Excludes VA Service-Connected Disability Benefits From Certain Income Determinations for Qualified Residential Rental Projects

On October 21, 2024, the Internal Revenue Service (IRS) published Revenue Procedure 2024-38 in Internal Revenue Bulletin 2024-43ⁱ providing guidance on the effect of updates to the Department of Housing and Urban Development (HUD) and Veterans Affairs (VA) Supportive Housing program (HUD-VASH), published in the Federal Register on August 13, 2024,ⁱⁱ on income requirements under Sections 142(d) and 42 of the Internal Revenue Code (the Code).

The HUD-VASH program administers HUD rental assistance in combination with supportive services through the VA and approved local public housing agencies. In the notice, HUD provides new waivers and program flexibilities for the HUD-VASH program, including a “HUD-VASH income eligibility waiver” for certain income requirements.ⁱⁱⁱ  

The HUD-VASH income eligibility waiver waives Section 3(b) of the USHA of 1937 and 24 CFR 5.609(a)(1), as each applies to the definition of annual income for the purpose of determining income eligibility. As an alternative, all VA service-connected disability benefits received by a HUD-VASH applicant and the income exclusions listed under 24 CFR 5.609(b) are excluded from the applicant’s annual income for purposes of determining income eligibility.

The IRS guidance clarifies that, consistent with the HUD-VASH income eligibility waiver, Sections 142(d) and 42 of the Code exclude VA service-connected disability benefits in certain income determinations for tenants in the HUD-VASH program. More specifically, for the purposes of initial and continuing income determinations under the following rules, all VA service-connected disability benefits are excluded from the income of prospective and current tenants approved to receive or currently receiving assistance under the HUD-VASH program and to whom the HUD-VASH income eligibility waiver applies:

1. Section 142(d)(2) and (3) of the Code, with respect to determining the income of individuals and compliance with income limits for qualified residential rental projects (used in determining the tax-exempt status of exempt facility bonds), and 
2. Section 42(g) and (i)(3) of the Code, with respect to qualified low-income housing projects and low-income units (used in determining low-income housing tax credits).

The IRS guidance generally applies to income requirements (i) with respect to qualified residential rental projects financed with exempt facility bonds under Section 142(d) of the Code with an issue date on or after October 24, 2024^iv and (ii) with respect to qualified low-income housing projects (as defined in Section 42(g) of the Code), and low-income units (as defined in Section 42(i)(3) of the Code) on or after October 24, 2024. 

If you have any questions regarding the content of this alert, please contact Sharon Brown, Public Finance Practice Area co-chair, at slbrown@barclaydamon.com; Carolyn Trespasz, associate, at ctrespasz@barclaydamon.com; or another member of the firm’s Public Finance Practice Area.
                                                                                                       
ⁱSee 2024-43 I.R.B.
ⁱⁱSee 89 F.R. 65769.
ⁱⁱⁱSee Section II.b of 89 F.R. 65769. 
^ivAlthough the guidance also allows for an effective date before October 24, 2024.