26 CFR 601.601: Rules and Regulations.

26 CFR 601.601: Rules and Regulations.

(Also Part I, §§ 25, 143)

Rev. Proc. 2021-19

SECTION 1. PURPOSE

This revenue procedure provides guidance with respect to the United States and

area median gross income figures for use by issuers of qualified mortgage bonds, as

defined in § 143(a) of the Internal Revenue Code, and issuers of mortgage credit

certificates, as defined in § 25(c), in computing the income requirements described in

§ 143(f).

SECTION 2. BACKGROUND

.01 Section 103(a) provides that, except as provided in § 103(b), gross income

does not include interest on any State or local bond. Section 103(b)(1) provides that

§ 103(a) does not apply to any private activity bond that is not a qualified bond (within

the meaning of § 141). Section 141(e) provides that the term "qualified bond" includes

any private activity bond that (1) is a qualified mortgage bond, (2) meets the applicable

volume cap requirements under § 146, and (3) meets the applicable requirements under

§ 147.

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.02 Section 143(a)(1) provides that the term "qualified mortgage bond" means a

bond that is issued as part of a "qualified mortgage issue". Section 143(a)(2)(A)

provides that the term "qualified mortgage issue" means an issue of one or more bonds

by a State or political subdivision thereof, but only if: (i) all proceeds of the issue

(exclusive of issuance costs and a reasonably required reserve) are to be used to

finance owner-occupied residences; (ii) the issue meets the requirements of

subsections (c), (d), (e), (f), (g), (h), (i), and (m)(7) of § 143; (iii) the issue does not meet

the private business tests of paragraphs (1) and (2) of § 141(b); and (iv) with respect to

amounts received more than 10 years after the date of issuance, repayments of

$250,000 or more of principal on financing provided by the issue are used not later than

the close of the first semi-annual period beginning after the date the prepayment (or

complete repayment) is received to redeem bonds that are part of the issue.

.03 Section 25(c)(1) provides that the term “mortgage credit certificate” means

any certificate that: (1) is issued under a qualified mortgage credit certificate program by

the State or political subdivision having the authority to issue a qualified mortgage bond

to provide financing on the principal residence of the taxpayer; (2) is issued to the

taxpayer in connection with the acquisition, qualified rehabilitation, or qualified home

improvement of the taxpayer’s principal residence; (3) specifies the certificate credit rate

and the certified indebtedness amount; and (4) is in such form as the Secretary of the

Treasury or the Secretary’s delegate (Secretary) may prescribe.

.04 Section 25(c)(2) provides that the term “qualified mortgage credit certificate

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program” means any program under which, among other requirements, the

indebtedness certified by mortgage credit certificates meets the requirements of

§ 143(f). See § 25(c)(2)(A)(iii)(IV).

.05 Section 143(f) imposes eligibility requirements concerning the maximum

income of mortgagors for whom financing may be provided by qualified mortgage

bonds. Generally, under §§ 143(f)(1) and 25(c)(2)(A)(iii)(IV), these income

requirements are met only if all owner-financing under a qualified mortgage bond and all

certified indebtedness amounts under a mortgage credit certificate program are

provided to mortgagors whose family income is 115 percent or less of the applicable

median family income. Under § 143(f)(3), in the case of targeted area residences, the

income limitation of § 143(a) applies to 2/3 of the owner financing and is treated as

satisfied if the family income of the mortgagor is 140 percent or less of the applicable

median family income. Under § 143(f)(6), if there are fewer than three individuals in the

family of the mortgagor, the income limitation of § 143(a) is reduced to 100 percent of

the applicable median family income and, in the case of targeted area residences, the

income limitation of § 143(a) is satisfied if the family income of the mortgagor is 120

percent or less of the applicable median family income.

.06 Section 143(f)(2) provides that, for purposes of § 143(f), the family income of

mortgagors, and area median gross income, are determined by the Secretary after

taking into account the regulations prescribed under section 8 of the United States

Housing Act of 1937 (if terminated, a successor program) (Housing Act).

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.07 Section 143(f)(4) provides that the term "applicable median family income"

means, with respect to a residence, the greater of (A) the area median gross income for

the area in which the residence is located, or (B) the statewide median gross income for

the state in which the residence is located.

.08 Section 143(f)(5) provides for an upward adjustment of the income limitations

in certain high housing cost areas. Under § 143(f)(5)(C), a high housing cost area is a

statistical area for which the housing cost/income ratio is greater than 1.2. The housing

cost/income ratio with respect to any statistical area is determined under § 143(f)(5)(D)

by dividing (a) the applicable housing price ratio for such area by (b) the ratio that the

area median gross income for such area bears to the median gross income for the

United States. The applicable housing price ratio for any area is the new housing price

ratio (new housing average purchase price for the area divided by the new housing

average purchase price for the United States) or the existing housing price ratio

(existing housing average purchase price for the area divided by the existing housing

average purchase price for the United States), whichever results in the housing

cost/income ratio being closer to 1.

.09 The Department of Housing and Urban Development (HUD) annually

computes the median gross income (adjusted by family size) for the United States, the

states, and statistical areas within the states. HUD releases the annually updated

income figures to its regional offices in a notice. The most recent income figures are

generally available by calling the HUD reference service at 1-800-245-2691, or at HUD's

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website, http://www.huduser.gov/portal/datasets/il.html (including a menu from which

the year and type of data of interest may be selected).

.10 Rev. Rul. 86-124, 1986-2 C.B. 27, provides the manner in which the income

limits under § 143(f) applicable to qualified mortgage bonds and mortgage credit

certificates are determined. In particular, the revenue ruling provides that, for purposes

of § 143(f)(4), to determine the area median gross income for an area or state in a

manner consistent with the determination of “median gross income” for the area or state

under section 8 of the Housing Act, issuers must use the income limits released by HUD

for Lower Income and Very Low Income under the Housing Act. Further, Rev. Rul. 86124 provides the manner in which issuers must apply these income limits. See

generally, Rev. Rul. 86-124, Guidelines.

.11 The Internal Revenue Service (IRS) has published a revenue procedure in

the Internal Revenue Bulletin annually, providing guidance with respect to the United

States and area median gross income figures that are to be used by issuers of qualified

mortgage bonds and issuers of mortgage credit certificates for purposes of computing

the income requirements under § 143(f). See, e.g., Rev. Proc. 2020-33, 2020-25 I.R.B.

956.

.12 The IRS has also published a revenue procedure in the Internal Revenue

Bulletin annually, providing the most recent nationwide average purchase prices and

average area purchase price safe harbor limitations for purposes of § 143(f)(5). See,

e.g., Rev. Proc. 2020-18, 2020-15 I.R.B. 592.

.13 The Department of the Treasury (Treasury Department) and the IRS

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requested public comments on whether, instead of publishing a revenue procedure

annually, such as Rev. Proc. 2020-33, the IRS should publish permanent guidance that

would allow issuers to rely on the HUD income figures immediately upon release. See

Rev. Proc. 2020-33, Section 6. The Treasury Department and the IRS also requested

public comments on the two-year convention with respect to the issuers’ reliance on the

HUD income figures, as provided in section 3.01 of Rev. Proc. 2020-33, and a transition

period, if necessary. See Rev. Proc. 2020-33, Section 6. Comments received

consistently favored publication of permanent guidance, retention of the two-year

convention, and provision of a transition period, such as a period of 90 days following

the release of the HUD income figures. As a result, the Treasury Department and the

IRS have decided to publish this revenue procedure as permanent guidance consistent

with comments received and to cease publishing annual revenue procedures providing

income figures for purposes of computing the income requirements of § 143(f).

SECTION 3. SCOPE

This revenue procedure applies to mortgage loans financed with qualified

mortgage bonds and to mortgage credit certificates.

SECTION 4. APPLICATION

.01 Applicable Income Figures. Except as provided in section 4.02 of this

revenue procedure, for purposes of computing the income requirements of § 143(f),

issuers of qualified mortgage bonds or mortgage credit certificates must use either

(1) the income figures HUD released most recently (Most Recent HUD Figures) or

(2) the income figures HUD released immediately prior to the Most Recent HUD Figures

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(Immediately Prior HUD Figures), determined as of the date a mortgage loan or

mortgage credit certificate is committed to a mortgagor.

.02 Transition Period. For mortgage loans and mortgage credit certificates

committed to mortgagors no later than 90 days after the date on which HUD releases

updated income figures for the calendar year, issuers of qualified mortgage bonds or

mortgage credit certificates may continue to use the income figures HUD released

during the second preceding calendar year for purposes of computing the income

requirements of § 143(f).

.03 Consistency Requirement. If an issuer uses the Most Recent HUD Figures to

compute the housing cost/income ratio under § 143(f)(5), the issuer must use the Most

Recent HUD Figures for all purposes under § 143(f). Likewise, if an issuer uses the

Immediately Prior HUD Figures to compute the housing cost/income ratio under

§ 143(f)(5), the issuer must use the Immediately Prior HUD Figures for all purposes

under § 143(f). For example, if an issuer uses the income figures HUD released in

2021 to compute the housing cost/income ratio under § 143(f)(5), the issuer must use

the income figures HUD released in 2021 for all purposes under § 143(f). Likewise, if

an issuer uses the income figures HUD released in 2020 to compute the housing

cost/income ratio under § 143(f)(5), the issuer must use the income figures HUD

released in 2020 for all purposes under § 143(f).

SECTION 5. EFFECT ON OTHER DOCUMENTS

.01 This revenue procedure obsoletes Rev. Proc. 2020-33.

.02 This revenue procedure amplifies Rev. Rul. 86-124.

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SECTION 6. EFFECTIVE DATE

This revenue procedure is effective for mortgage loans and mortgage credit

certificates committed on or after March 25, 2021.

DRAFTING INFORMATION

The principal authors of this revenue procedure are Jian H. Grant and David

White of the Office of Associate Chief Counsel (Financial Institutions & Products). For

further information regarding this revenue procedure contact Mr. White at (202) 3176980 (not a toll-free call).