What Is Form 8823 and How Does It Affect You?

Form 8823, “Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition,” is an informational document filed by state Housing Credit Agencies (HCAs) with the Internal Revenue Service (IRS). It is not a form that property owners complete; rather, it is used by the state agency to report that a property receiving the Low-Income Housing Tax Credit (LIHTC) is either out of compliance with program rules or that the building has been sold.

The LIHTC program provides a dollar-for-dollar reduction in federal tax liability for owners of qualifying rental properties, incentivizing affordable housing. In exchange for this tax benefit, owners must adhere to rules for an extended period, and the HCA in each state ensures these rules are followed. When an HCA discovers a problem, Form 8823 serves as the official channel to notify the IRS, which can trigger consequences for the property owner.

Reasons for Filing Form 8823

A state HCA files Form 8823 for two primary reasons: to report noncompliance with LIHTC program rules or to report the disposition of a building. Noncompliance issues are the most common trigger and can range from administrative errors to operational failures. The form details the specific nature of the issue, providing the IRS with a clear picture of the property’s status. This reporting is a mandatory part of the HCA’s oversight responsibilities under Section 42 of the Internal Revenue Code.

The second reason for filing is the disposition of a property. This includes events like a sale, a transfer of ownership, or a casualty loss from a fire or natural disaster. Because tax credits are tied to a long-term commitment, any change in ownership or the building’s physical status must be reported to the IRS to track compliance or signal that credit recapture may be warranted.

Noncompliance

Common noncompliance issues that trigger a Form 8823 filing include:

• Failing to meet the minimum set-aside. On Form 8609, owners elect to rent either at least 20% of units to tenants at or below 50% of the Area Median Gross Income (AMGI), or 40% of units to tenants at or below 60% of AMGI. Failure to meet this elected threshold constitutes noncompliance.
• Charging incorrect rents. The gross rent for a low-income unit, which includes an allowance for tenant-paid utilities, cannot exceed the specified limit for that unit’s size and income designation. If an HCA discovers that rents are too high, it must report this noncompliance.
• Having improper tenant certifications. Issues such as missing documentation or mathematical errors that result in housing an over-income household are reportable events.
• Failing physical inspections. Properties must meet local health and safety codes or federal physical inspection standards. Violations like broken windows, inoperable smoke detectors, or structural deficiencies that render a unit uninhabitable can lead to a noncompliance finding.
• Violating the “available unit rule.” If a low-income tenant’s income rises above 140% of the current income limit, the owner must rent the next available market-rate unit to a qualified low-income household to maintain the property’s required fraction of low-income units.

Building Disposition

An HCA will file Form 8823 when a building is sold or transferred. The LIHTC program requires a 15-year compliance period, and a sale during this time has implications for the tax credits. The form notifies the IRS of the change in ownership, which is necessary for the new owner to continue claiming the remaining credits and assume responsibility for compliance. The filing ensures there is a clear record of who is accountable for the property’s adherence to program rules.

The form is also filed for a casualty loss, such as a fire or flood that damages the building. Physical damage that makes units unsuitable for occupancy is considered a form of noncompliance and can affect the building’s qualified basis—the figure used to calculate the annual tax credit. The owner may be given a reasonable period to restore the building, but the event itself must be reported.

The Correction Process

When an HCA identifies noncompliance, it issues a written notice to the property owner, which begins the “correction period.” This period, often between 30 and 90 days, is the owner’s opportunity to fix the identified issues. The owner’s task is to remedy the specific problems cited in the notice.

For example, if the issue is overcharged rent, the owner must adjust the rent and may need to reimburse the tenant. For physical inspection failures, the owner must make the necessary repairs. Proof of these actions, such as copies of new lease agreements or invoices from contractors, must be submitted to the HCA as evidence of correction.

At the end of this period, the HCA files Form 8823 with the IRS, regardless of whether the noncompliance has been resolved. The form allows the HCA to check a box indicating that the noncompliance was corrected. A Form 8823 showing the issue was resolved by the deadline is viewed more favorably by the IRS than one showing uncorrected noncompliance.

Impact of an Uncorrected Filing

If a property owner fails to remedy issues within the allotted correction period, the HCA will file Form 8823 indicating that the noncompliance remains uncorrected. An uncorrected filing increases the risk of an IRS audit and can lead to the disallowance of current year tax credits and the recapture of credits claimed in previous years.

Credit recapture is the primary consequence of uncorrected noncompliance. Because the LIHTC is granted based on a promise to maintain compliance for a 15-year period, the IRS can require the owner to pay back a portion of the tax benefits they have already received. The recapture amount is often one-third of the credits claimed, plus interest, though the specific calculation depends on when the noncompliance occurred.

Upon receiving a Form 8823 showing uncorrected noncompliance, the IRS may review the owner’s tax returns and seek repayment. Owners may have an opportunity to resolve the issue even after the initial correction period has passed.

If the noncompliance is fixed within three years from the end of the original correction period, the HCA will file a subsequent Form 8823 to inform the IRS that the property has returned to compliance, which can help mitigate penalties.