5 Tips for Dealing Correctly with Different Unit Types

When complying with the tax credit law, you must follow different rules depending on which of the five types of tax credit units you’re dealing with. But tax credit managers often get confused about which rules apply to which type of unit, or even about how each unit type differs. If this happens to you, you may get tripped up in your compliance efforts. And dealing with different unit types incorrectly could put some or even all of the owner’s tax credits at risk.

To help you avoid this confusion and the compliance missteps that may follow, we’ll tell you how the tax credit law defines each of the five different unit types found at tax credit sites. And we’ll give you five tips for handling these units properly.

Unit-Type Basics

You may have up to five types of units at any tax credit site you manage. They are:

Empty units. An “empty unit” is a unit that you haven’t yet rented to any household. It’s a unit that has never been occupied. During lease-up, all units start off as empty units. Once you rent a unit to a low-income or market-rate household, the unit will never again be considered an empty unit, even if it becomes unoccupied. Owners can’t claim credits for empty units.

Low-income units. A “low-income unit” is a unit that’s occupied by a household earning no more than a certain percentage of area median gross income (AMGI). This percentage depends on your site owner’s minimum set-aside election. For instance, if the minimum set-aside aside for your site is “20-50,” a unit is low-income if it’s rented to a household earning no more than 50 percent of AMGI. Owners can claim credits for low-income units.

Vacant units. When a low-income unit becomes unoccupied, it’s known as a “vacant unit.” Owners can claim credits for vacant units if the site complies with the vacant unit rule.

Over-income units. If the income of the household occupying a low-income unit exceeds 140 percent of the income limits (or 170 percent, in the case of deep rent-skewed units), the unit is considered an “over-income unit.” Owners can claim credits for over-income units if the site complies with the next available unit (NAU) or deep rent-skewing rules.

Market-rate units. A “market-rate unit” is a unit that you don’t need to rent to households earning below a certain income level. The tax credit program’s rent restrictions don’t apply to these units. You’re free to charge the prevailing market-rate rent for your market-rate units just as if they were part of a conventional site. Owners can’t claim credits for market-rate units.

Tip #1: Rent Empty Units Before Vacant Units

You may think that because vacant and empty units are both unoccupied, it doesn’t matter which type you rent first. But it’s always smart to lease up all your empty units to qualified low-income households before you rent any vacant units to such households. This is because your site’s owner can claim credits for vacant units, but not for empty units.

Once you meet your site’s minimum set-aside, you should give priority to renting any empty units you may still have at your site. Empty units don’t count for low-income occupancy purposes until they’ve been rented. So renting more empty units to low-income households will make it easier to maintain your minimum set-aside during the remainder of the compliance period.

Also, if the first-year fraction for any of your buildings fell short of the owner’s target, you should rent your empty units as soon after meeting the set-aside as you can. Then the owner may be entitled to claim all the credits it was allocated.

Tip #2: Don’t Assume Same Eligibility for All Low-Income Units at Multibuilding Site

Don’t assume that the eligibility requirements for low-income units are the same at all buildings at a multibuilding site. If you have more than one building at your site, you may need to meet one set-aside for the entire site. Or you may have a different set-aside for each building or combination of buildings. As a result, you may have different eligibility requirements for your site’s low-income units depending on the building in which they’re located.

To figure out whether the owner elected to meet its minimum set-aside based on the entire site, look at line 8b on IRS Form 8609, Low-Income Housing Credit Allocation and Certification. This line asks: “Are you treating this building as part of a multiple building project for purposes of section 42?” If the owner checked yes, then you may aggregate all units from all buildings to satisfy the minimum set-aside for the project.

If the owner checked no, then you may need to meet the different set-asides for your site’s buildings. For example, at a two-building tax credit site, suppose the owner elected to meet the 20-50 set-aside for Building A and the 40-60 set-aside for Building B on each building’s IRS Form 8609 (line 10c). The leasing manager must understand that a low-income unit in Building A is defined as a unit that’s occupied by a household earning 50 percent or less of AMGI. And a low-income unit in Building B is a unit that’s occupied by a household earning 60 percent or less of AMGI. So if applicants apply for a low-income unit at the site and the leasing manager determines that they earn 51 percent of AMGI, she can rent a low-income unit in Building B to them but not a low-income unit in Building A.

Tip #3: Follow Vacant Unit Rule When Low-Income Unit Becomes Vacant

When a low-income unit becomes vacant and, therefore, becomes a “vacant unit,” you’ll need to make sure that the owner can continue to claim credits for that unit. To do this, you must follow the vacant unit rule. Under this rule, the owner’s credits stay safe as long as you make reasonable attempts to re-rent your vacant (low-income) units to new, qualified low-income households. This means you can’t rent an empty market-rate unit of comparable or smaller size in any building at your site until you’ve made reasonable attempts to re-rent your vacant unit.

Tip #4: Don’t Evict Households from Over-Income Units Because They Earn Too Much

Don’t evict a household from an over-income unit because that household earns too much income. You don’t need to do this unless your state housing agency specifically requires it. Once you’ve determined that a household is qualified to occupy a low-income unit and you’ve certified that household’s income, the household stays qualified regardless of how high its income rises.

You needn’t evict the household to save the owner’s credits. The owner stays entitled to claim credits for over-income units if you follow the NAU or deep rent-skewing rules. To do this, you must rent the next available unit of comparable or smaller size in the same building to a qualified low-income household. If your site is deep rent-skewed, the owner must rent the next available low-income unit in the building of any size to a household earning no more than 40 percent of AMGI.

Tip #5: Keep Market-Rate Units in Compliance

It’s true that you needn’t rent your market-rate units to low-income households nor charge a restricted rent for them. But these units aren’t exempt from all of the tax credit program’s requirements. Some key parts of the tax credit law apply to your market-rate units. And if you don’t meet these requirements, you could put the owner’s tax credits at risk. To comply, your market-rate units must be:

Suitable for occupancy. This means your market-rate units must comply with local health, safety, and building codes. At the least, you must fix local code violations relating to your market-rate units. This may involve repairing or replacing faulty sprinklers or smoke detectors, clearing the market-rate unit of pest infestation, or fixing electrical, heating, or plumbing problems.

Also, review your state housing agency’s standards for inspecting units to learn what else you may need to do to keep the unit suitable for occupancy. Agencies may use HUD’s Uniform Physical Condition Standards or local codes as their inspection standards. But even if your agency uses HUD’s standards, local codes still apply, so you must fix local code violations to avoid noncompliance.

Available for rental to the general public. This means you can’t reserve any market-rate units for members of certain social groups. It also means that you can’t reject market-rate prospects for illegally discriminatory reasons. If you get a fair housing violation, your state housing agency will report your site to the IRS for tax credit noncompliance. Federal fair housing law makes it illegal to reject prospects on the basis of race, color, sex, religion, disability, national origin, or familial status. Your state or municipality may also ban discrimination based on other characteristics, such as age, sexual orientation, or source of income.

Used primarily for residential purposes. This means you must rent your market-rate units only to individuals and not to companies. It’s okay to have commercial space at your tax credit site. But your units are included in your site’s eligible basis, which means they must be kept residential. You may let residents conduct some business in their units. But if a household doesn’t keep its unit primarily residential, the unit won’t be in compliance.