Complete Checklist Before Each Rental to Confirm Tax Credit Compliance
Before you rent any unit at your tax credit site to a new household, it’s important to confirm that the rental will comply with the tax credit law. If your rental of a unit won’t comply, the owner’s credits for that unit may be at risk. And if the unit is one you must count to meet or maintain your site’s minimum set-aside, that one noncomplying unit may place all the owner’s credits in jeopardy.
To ensure compliance, you should confirm that the proposed rental will meet the requirements for compliance before you sign a lease for a low-income or market-rate unit. To help you do this, we’ll give you a Model Form: Rental Compliance Checklist. This checklist requires you to answer questions each time you propose to rent a unit at your tax credit site to a new household, to confirm that the rental will comply with the law.
How to Complete Checklist
Our checklist asks eight questions. Before you rent any unit at your tax credit site to a new household, you must be able to answer yes to every question that applies. This will confirm that the unit will comply with the tax credit law if you rent it.
If you can’t answer yes to a question, you’ll have a compliance problem if you rent the unit, so you shouldn’t sign a lease unless you can resolve the problem. The first three questions on the checklist apply to all units at a tax credit site—whether they’re low-income or market-rate. The remaining five questions apply only to low-income units. So if you manage a 100 percent building (that is, a building with no market-rate units), you must answer yes to all eight questions before renting any unit at your site. But if you manage a mixed-income building, you’ll need to answer yes to only the first three questions before renting your market-rate units. Here’s how to use the checklist:
Say whether unit is low-income or market-rate. After writing down the building’s identification number, the unit number, and the household name at the top of the checklist, circle “low-income” or “market-rate” to identify the type of unit. Remember that if you manage a 100 percent building, all the units in your building must be low-income to maintain an applicable fraction of 100 percent.
Answer questions. Check off the “yes” or “no” box next to each applicable question to indicate your answer. If the unit is market-rate, answer only the first three questions. Otherwise, answer all eight questions.
Write date. Finally, write down the date you complete the checklist. This way, any staff member or auditor who compares your checklists to your leases for the same units will note that you completed your checklists before deciding whether to rent units to new households.
Keep checklists in building file. Keep your completed checklists for each unit in a separate folder in the building’s file. As you complete more checklists for units in that building, file them together in the same folder.
Three Questions for All Units
You must answer yes to these three questions before you rent any unit—low-income or market-rate—at your tax credit site to a new household:
1. Is the unit suitable for occupancy? Before renting a unit to a new household, make sure that the unit is suitable for occupancy. The tax credit law requires that every unit at your site be suitable for occupancy, taking into account local health, safety, and building codes. This means that, at the least, you must fix local code violations relating to the unit. For instance, you may need to repair or replace faulty smoke detectors or sprinklers in the unit, clear the unit of pest infestation, or fix electrical, heating, or plumbing problems in the unit.
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, you must still fix local code violations to avoid noncompliance.
2. Is the unit available for rental to the general public? Units at your tax credit site must be available for rental to the general public. This means that you can’t reserve any units for members of certain social groups. For instance, you can’t rent Unit 5G to a household because one of its members belongs to a local animal rights group and you’ve reserved the unit for residents that belong to that group.
Keeping a unit available for rental to the general public also means that you can’t rent a unit to a household if your leasing agents must turn away other prospects for discriminatory reasons. If you rent a unit after your leasing agents discriminate, you’ll risk noncompliance and fair housing violations.
3. Will the unit be used primarily for residential purposes? Make sure the proposed rental is to a household—not a company. And make sure the lease the household will sign has a clause requiring its members to use their unit for living purposes. 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.
Five More Questions for Low-Income Units
You must answer yes to these five additional questions before renting any low-income unit at your tax credit site to a new household:
1. Have you certified and verified the household’s income? Before you rent a unit to a low-income household, you must certify and verify the household’s income. To do this, the tax credit law directs you to follow Section 4350.3 of the HUD Occupancy Handbook (“Occupancy Requirements of Subsidized Multifamily Housing Programs”), which details whose income you must count, how you must calculate income, and what the acceptable methods are for verifying each type of income.
Keep in mind that The Housing and Economic Recovery Act of 2008 (HERA) allows states to provide an exemption from tenant annual income recertification requirements for 100 percent Low‐Income Housing Tax Credit sites where all initial certifications were properly income-qualified.
2. Did you calculate the correct rent? Before renting a unit to a low-income household, make sure you’ve calculated the rent based on the correct method. Under the tax credit law, you can’t charge more than the “maximum allowable rent”—which is based on 30 percent of area median gross income—for your low-income units. If you charge more, the unit will be out of compliance.
An owner calculates the maximum allowable rent for each unit size using the site’s income limits. An owner imputes a family size of 1.5 persons per bedroom and one person for a studio or an efficiency apartment. Maximum allowable rent equals 30 percent of the site’s income limit for the imputed family size. The maximum allowable rent for a studio/efficiency is 30 percent of a site’s one-person income limit.
A one-bedroom unit is 30 percent of a site’s income limit for 1.5 persons, calculated by averaging the one- and two-person income limits. A two-bedroom unit is 30 percent of a site’s three-person income limit (2 bedrooms x 1.5 persons = 3 persons). A three-bedroom unit is 30 percent of a site’s income limit for 4.5 persons, calculated by averaging the four- and five-person income limits (3 bedrooms x 1.5 persons = 4.5 persons). A four-bedroom unit is 30 percent of a site’s six-person income limit (4 bedrooms x 1.5 persons = 6 persons). A five-bedroom unit is 30 percent of a site’s income limit for 7.5 persons, calculated by averaging the seven-person and eight-person income limits (5 bedrooms x 1.5 persons = 7.5 persons).
3. Is the utility allowance correct? Make sure that when you calculate the rent you’ll charge for a low-income unit, you’re factoring in a monthly allowance for utilities. To do this, you must get the correct utility allowance and subtract it from the household’s (gross) rent. The result is the household’s net rent, which is the amount you actually charge the household each month.
The utility allowances you use must come from the right source. This depends on whether your building is tax credit only, gets regulated by HUD, or gets assistance through Rural Housing Services (commonly known as “RD”).
4. Will you be renting the unit on a nontransient basis? Make sure the household will agree to sign a lease for at least six months. The tax credit law requires you to rent units on a nontransient basis. This prevents tax credit sites from being used for short-term housing and ensures that owners don’t take illegal shortcuts in meeting their site’s minimum set-aside by moving households around after a few months. The transient unit rule has exceptions for specific types of homeless shelters and single-room occupancy units. Generally speaking, the IRS presumes that a unit isn’t being rented on a transient basis if the household commits to an initial lease term of at least six months. So it’s best to make sure your initial lease with each household runs for at least this length.
5. Will the unit be occupied by at least one resident who isn’t a full-time student? If not, does the household meet one of the student rule’s four exceptions? You must follow the “student rule” when renting your units to low-income households. Under this rule, a low-income unit generally can’t be occupied only by full-time students. But a unit will still be in compliance if at least one household member is a part-time student or if one of the following exceptions to the rule applies:
- All household members are married and have already filed joint tax returns;
- The household consists of a single parent with a dependent child (or children), and the parent and child aren’t being claimed as dependents by anyone else;
- A student receives assistance under Title IV of the Social Security Act, also known as Temporary Assistance to Needy Families (TANF);
- A student is enrolled in a job training program receiving assistance under the Workforce Investment Act (formerly known as the Job Training Partnership Act) or under a similar federal, state, or local program;
- A student was previously under the care and placement responsibility of the state agency responsible for administering a plan under Title IV of the Social Security Act (Foster Care).
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