How to Avoid 3 Tax Credit Problems with Granting Unit Transfer Requests
Households may seek to transfer to different units at a site for various valid reasons. There may be a change in household composition. A household may seek a unit with additional bedrooms due to additional members joining the household. Or a member with a disability may seek a transfer because another unit better meets the needs of that individual. Also, the Violence Against Women Act (VAWA) requires tax credit sites to have emergency transfer plans in place for victims of covered VAWA violence.
However, when a household at your tax credit site asks to transfer to a different unit, you need to be aware of when granting the request could lead to tax credit loss. For instance, if you let a household move to a unit in a different building at your site, the owner might not be able to continue claiming credits for that household’s unit. And even if you let a low-income household move to a different unit in the same building, the transfer could lower the building’s applicable fraction, denying the owner the right to claim as many tax credits as it was allocated.
To avoid making mistakes that could jeopardize the owner’s tax credits, you must know, before granting a household’s transfer request, how it would affect compliance. We’ll go over three common problems tax credit managers face when handling transfer requests and how they can be avoided at your site.
Problem #1: Transferring Household to Different Unit Lowers Building’s Applicable Fraction
According to tax credit rules, when a household moves to a different unit within the same building, the newly occupied unit adopts the status of the vacated unit. Thus, if a current household, whose income exceeds the applicable income limitation moves from an over-income unit to a vacant unit in the same building, the newly occupied unit is treated as an over-income unit. The vacated unit assumes the status the newly occupied unit had immediately before it was occupied by the current resident [Treas. Reg. §1.42-15(d)].
Units in buildings with market units also switch status upon transfer. However, it’s important to ensure that the applicable fraction isn’t negatively affected when transferring a household into a formerly market unit of differing size. If you transfer a low-income household to a unit in the same building that’s smaller than its current unit, your applicable fraction could go down.
How to avoid. Before granting a low-income household’s transfer request, take these three steps:
> Step #1: Compare unit sizes. Compare the square footage of the old and new units. If the new unit is the same size or larger than the old unit, the transfer won’t lower your building’s applicable fraction.
> Step #2: Recalculate applicable fraction. If the new unit is smaller than the old unit, recalculate your applicable fraction to see how it would be affected. If the transfer would cause your building’s applicable fraction to dip below its first-year fraction, the owner will lose tax credits if you grant the request.
A transfer to a smaller unit doesn’t automatically trigger tax credit loss. If you let a low-income household transfer to a smaller unit in your building, it generally won’t harm the owner’s tax credits if:
- The transfer causes your building’s applicable fraction to drop, but not below the level of your building’s first-year fraction (Exception: If the first-year fraction fell short of the owner’s target, you may need to maintain a higher applicable fraction so the owner can claim all the credits it was allocated);
- Your building’s unit fraction would stay below the floor space fraction after the transfer. The unit fraction is the number of low-income units in your building divided by the building’s total units. And the floor space fraction is the floor space (in square footage) of your low-income units divided by the total floor space of all units in your building. To calculate the applicable fraction, you must take the lesser of the unit fraction and floor space fraction. So, if your building’s unit fraction would still be lower after the transfer, the fact that the low-income household would occupy a smaller unit wouldn’t affect your building’s applicable fraction; or
- The transfer is at a 100 percent tax credit building. That’s because every unit at a 100 percent building must be rented to a qualified low-income household to maintain the building’s applicable fraction.
> Step #3: Get advice. Don’t grant a household’s transfer request unless you’re 100 percent sure that it won’t adversely affect the owner’s ability to claim all the credits it’s entitled to. Protecting the owner’s investment always takes precedence over a household’s desire to move to a different unit at your site. Speak to your tax credit consultant or accountant if you’re not sure about how a transfer would affect your building’s applicable fraction.
Problem #2: Not Being Able to Count Old Units After Transferring Households During Lease-Up
For the first year that credits are claimed for a building or buildings, the 8823 Guide provides an example of what happens when a household that's the first occupant of low-income unit moves to another unit in a different building during this time: “In the first year of the credit period, an income qualified household moved into a new, never-occupied, low-income unit in Building A. The household moved in during May of the first credit year. In October, the household transfers to a similar rent-restricted unit in Building B, which had never been occupied, and continued to occupy the unit until the end of the first credit year. The unit in Building A was not rented again until the following February.”
In this example, the IRS emphasizes that only the unit the household occupies qualifies as a low-income unit. The unit in Building A would qualify for May, June, July, August, and September. The unit wouldn’t qualify as a low-income unit in October, November, or December for purposes of computing the Applicable Fraction for the first year. And the unit in Building B is a qualified low-income unit for October, November, and December. The unit will continue to be treated as a never occupied unit until a qualified household moves in.
Therefore, a qualified household can qualify only one unit at a time and transferring them around a property doesn’t qualify more than one unit. In other words, you can’t use the same household to qualify more than one low-income unit during lease-up.
That said, you may move a qualified low-income household to a new unit during lease-up if you need to. And you don’t need to redo that household’s initial certification if the household transfers to a different unit in the same building. But you can’t count both units as low-income for purposes of meeting your site’s first-year occupancy requirements. If you do, your site won’t qualify for the tax credit program, which means the owner won’t be entitled to claim any of the credits it was allocated for your site.
How to avoid. To avoid double counting and jeopardizing credits, carefully follow the unit transfer rule, and keep track of the status of the units so you know which unit to count as low-income. Under this rule, if you transfer a low-income household to another unit in the same building, the old and new units swap status.
For instance, if you lease up an empty unit to a qualified low-income household, then transfer that household to another empty unit. That new unit would become a low-income unit, and the household’s old unit would again become an empty unit (meaning one that has never been qualified).
Problem #3: Transferring Household to Different Building Costs Owner Tax Credits
At mixed-income sites, when you transfer a low-income household to a unit in a different building at your site, you need to know if the IRS classifies the two buildings as being part of the same project. This can be determined by the line 8b election on tax form 8609. If checked “yes” for both buildings (the building is part of a multi-building project) and both buildings are included on an attached list of buildings part of the multi-building project, they are part of the same project.
If both are not true, then transfers to the new building must be treated as new move-ins, with the household qualifying for the new unit under current income limits. In other words, the tax credit law requires you to treat that household as a new household. This means you must redo that household’s initial certification to determine its eligibility.
For buildings that are part of the same project, IRS guidance establishes that units also switch status when a household who isn’t “over-income” (not over 140 percent of the current income limit or 170 percent for deep rent-skewed projects) moves to a unit in a different building. The vacated unit assumes the status the newly occupied unit had immediately before it was occupied by the current resident [Rev. Rul. 2004-82, Q&A #8]. The option to leave the building is available only to households who aren’t over the 140 percent income limit at their most recent recertification. This is part of the Available Unit Rule [Treas. Reg. §1.41-10].
For example, the Smiths occupy a low-income unit at your two-building tax credit site. When recertifying the Smiths’ household, you calculated their income to be 110 percent of the income limit. The Smiths are still eligible to occupy a low-income unit if they stay where they are or if they transfer to a different unit in the same building. In fact, because the Smiths’ income doesn’t exceed 140 percent of the limits, they’re not even considered over-income.
However, if the Smiths transfer to a unit in the other building at your site, you must treat the Smiths as a new household and redo their initial certification. Suppose the initial certification finds the Smiths won’t be eligible to occupy a low-income unit in your other building because they earn too much. As a result, if you transfer the Smiths to a low-income unit in your other building, you won’t be able to continue counting that unit as low-income. As a result, the owner won’t be able to claim credits for that unit.
How to avoid. Don’t transfer low-income households to units in a different building at your mixed-income site if they’re even one dollar above the income limits. Instead, look to transfer such households to a different unit in the same building so that the owner won’t lose credits.
It’s important to note that households residing in 100 percent LIHTC projects where annual income recertifications are irrelevant can transfer between buildings within the project. You don’t have to treat the transferring household as a new household with another initial recertification.
The 8823 Guide provides an example titled “Household in 100% LIHC Project Transfers Between Buildings”:
On August 15, 2008, an income-qualified household moved into a low-income unit. The unit was part of a 100% LIHC multi-building project as identified by the owner on Form 8609, line 8b. The household was not required to complete annual income recertifications and, therefore, the household’s current income was not known when, on January 15, 2010, the household requested a transfer to a low-income unit in another building within the project. The household may transfer to a low-income unit in another building within the project even though the household’s income is not known.