Commercial Use of Community Room

Q My community room is part of the building’s basis for tax credit calculation purposes, meaning that the owner counts it as part of the property for which the state has awarded tax credits. Residents have asked me to permit a local hairdresser to use the community room once a week to provide beauty services to residents, and the hairdresser has asked me to wall off a section of the community room for this purpose. While I wouldn’t charge the hairdresser rent to use the space, the hairdresser would charge residents for her services. If I okayed this arrangement, would it prevent the owner from claiming the full amount of its tax credits?

A No. Although IRS regulations prohibit commercial use of resident facilities such as community rooms, if those facilities are included in a portion of the building that’s counted for tax credit purposes, the use as described above would not rise to the level of a commercial activity for IRS purposes. This is because the IRS considers common area to be used for commercial purposes only if it is “converted” to a commercial use, says tax credit expert A.J. Johnson, president of A.J. Johnson Consulting Services.

Use of part of a community room once a week would not generally be considered a “conversion.” Also, the IRS has defined a commercial activity as one that generates or is intended to generate a profit. In this example, since the owner is charging no rent, it would not be considered an owner conversion to commercial space. The use here is similar to allowing a local agency to use the pool once a week to provide swimming lessons—for a fee—to residents, or providing a fee-based lesson on how to use a computer, explains Johnson. These are considered tenant services, and as long as they are optional, and the tenants are not being charged a fee to use the space (the fee is actually for a service offered in a space), it would not be considered a commercial activity