Follow Three Guidelines When Renting to Live-In Employee
You may be weighing the advantages of having a full-time live-in staff member at your tax credit site. But before you set aside a unit for a member of your management, leasing, or maintenance staff, there are a few guidelines that you must be aware of to stay in compliance.
Available Options for Employee Units
If you are planning to charge the employee rent for the unit, the Internal Revenue Service (IRS) makes two options available, depending on the type of project.
Market-rate unit. If you manage a mixed-income site and your employee's income is too high to qualify for a low-income unit, you can offer him a market-rate unit. There are no compliance requirements with a market-rate unit; however, the employee may not be able to afford to pay the full market rent.
Low-income unit. If you manage a 100 percent tax credit or mixed-income site, and your employee qualifies as a low-income resident, then you can offer a low-income unit as long as you conduct a full income certification of the employee. However, if the employee quits or is terminated, you cannot evict him unless he violates his lease.
In both of these cases, the employee has the same general rights and privileges as any other resident, says housing expert A.J. Johnson, president of A.J. Johnson Consulting Services.
However, because the employee is living onsite for the benefit of the owner, the IRS also allows tax credit sites to set aside employee units as part of the site's common area (which is similar in treatment to community rooms, leasing offices, and laundry rooms). “The cost of the employee unit can be included in the basis for tax credit purposes, but the unit itself does not show up in the building's applicable fraction, so it is eliminated as a unit,” Johnson explains. “This allows sites to maintain their full tax credits even though they have an employee in the unit.”
Three Guidelines to Stay in Compliance
If you plan to set aside an employee unit as part of your site's common area, there are three critical guidelines that you must follow in order to obtain tax credits on the unit.
Get state approval. Your state housing agency must approve the use of the unit as an employee unit.
Do not charge rent. Because the unit is considered to be part of the site's common area, you cannot charge the employee any rent. “One of the requirements for including common areas in the eligible basis is that the common area represents a facility reasonably required by the project,” says Johnson. “If it's required, you cannot charge for it, or it will call into question the owner's ability to claim credits on the unit.”
Hire employee on full-time basis. The employee needs to be available full time to the specific site. “Live-in employees cannot split their time among multiple properties, or it could call into question whether they are really necessary for this one particular site,” Johnson says.
Use Employment Agreement Instead of Lease
Once you have complied with the previous guidelines, you will need to ask your attorney to draft an employer-employee agreement for the unit. The agreement will take the place of a lease to ensure that the employee has no tenancy rights should he quit or be terminated.
The agreement should clearly state the conditions for occupancy, which should include that the employee is residing in the unit as a condition of employment and for the benefit of the owner; and the terms under which the employee will vacate the unit if he quits, is terminated, or if the site no longer needs the employee unit.
It is imperative for site managers to have their local attorney review the agreement, says Johnson. “There are local laws regarding tenancy that only the local attorneys know and will be able to address.”
A.J. Johnson: President, A.J. Johnson Consulting Services, Inc.; (757) 259-9920; http://www.ajjcs.net
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