How to Keep Track of Over-Income Households to Comply with NAU Rule
Sometimes a household's income rises above tax credit program limits. When this happens, you have to comply with an IRS rule known as the “next available unit” (NAU) rule. But many managers fail to comply with this key rule. And that can have costly consequences. If the appropriate NAU isn't rented to a qualified, low-income household, the IRS may take back credits that the owner has already claimed and bar the owner from taking credits in the future.
Fortunately, this is a situation you can avoid if you keep the right records. We'll tell you what records to keep. And we'll give you a Model Form: Over-Income Household Log to help you identify and keep track of over-income households that trigger the rule.
How Log Helps
The NAU rule applies whenever a household's income rises above 140 percent (or 170 percent at deep-rent skewed sites) of the tax credit program's income limits. In general, the rule permits units occupied by households whose income exceeds 140 percent of the maximum allowable income (or 170 percent of deep-rent skewed limits) to remain eligible for tax credit purposes, but only if you rent the next available market-rate or rent-restricted unit of comparable or smaller size in the same building to a qualified, low-income applicant [Internal Revenue Code §42(g)(2)(D)]. Thus, management personnel in charge of leasing need to know if there are any over-income households in the building before renting a vacant unit, says tax credit consultant A.J. Johnson.
A log will help in two ways. First, it helps your staff identify over-income households. And second, it alerts those responsible for leasing to the fact that they must lease the next available unit to a qualified, low-income applicant.
What Log Covers
To identify over-income households and help ensure that vacant units are properly rented, have your staff complete a log entry every time it recertifies a household. Before you complete the log, find out from the owner whether the 140 percent or 170 percent trigger applies to the unit. Our log covers the following key points:
Household size. To confirm a household's income limit and, therefore, whether and by how much the household is over-income, you'll need to know the number of persons in the household. This information should be in your certification paperwork for the household.
Unit size. The next available unit must be of comparable or smaller size. Because you'll need to compare the next available unit to the over-income unit, keep track of the over-income unit's size.
You must compare the next available unit with the over-income unit based either on square footage or number of bedrooms. Use the same method as the owner uses to calculate its tax credit for the year in which you recertify that a household is over-income.
If the owner uses square footage, you must also. The square footage for a unit is the square footage from the floor plans, says Johnson, a copy of which should be in your rental office. If the owner uses the number of bedrooms, you should compare the units using that information.
Recertification date. This is the date that you completed the recertification that showed that the household did or did not go over 140 (or 170) percent of the maximum allowable income.
Maximum allowable income on recertification date. Get this from the Department of Housing and Urban Development's (HUD's) area median gross income table. Depending on the owner's agreement with the state finance agency and the IRS, the household will need to be at 60, 50, or a lower percent of the area median gross income. If you don't know which percentage applies to the unit that you're recertifying, check with the owner.
If your tax credit households are supposed to be at 50 percent of area median gross income, read the “very low income” row to reach the number underneath the appropriate household size. That number is the maximum allowable household income.
If your tax credit households are supposed to be at 60 percent of area median gross income, multiply the very low income number by 1.2. And if your tax credit households are supposed to be at less than 50 percent of area median gross income, multiply the very low income number by the required percentage divided by 50 percent. For example, if the agreement stipulates 40 percent, multiply by 0.8 (40 divided by 50).
Household's current income on recertification date. This number is the result of your most recent recertification.
Calculation of household income as a percentage of current maximum allowable income. The NAU rule applies, says Johnson, whenever household income in one or more of your units goes over 140 percent of the current maximum allowable income (or 170 percent in deep-rent skewed units). To determine if a household is over 140 or 170 percent of the maximum allowable income, divide line 7 on our log (the household's current income) by line 6 (the household's maximum allowable income. Enter the result on line 8. If the result is larger than 1.4 (or 1.7 for a deep-rent skewed unit), check yes on line 9.
For example, say the maximum allowable income for a family of four is $25,000 (line 6). Last year, the four-member household in Unit 2C recertified their income at $23,000 (line 6). Upon recertification this year, you learn that the household head switched jobs and received a $13,000 pay raise, increasing total family income to $36,000 (line 7). If you divide the household income ($36,000; line 7) by the maximum allowable income ($25,000; line 6), the result is 1.44 or 144 percent. The household's income is above 140 percent of the maximum allowable income, and the NAU applies.
Maximum allowable monthly rent. This is the highest monthly rent you may charge a qualified, low-income household according to IRS tax credit regulations.
Household's current rent. For you to comply with the NAU rule and continue counting the over-income unit for tax credit purposes, the household's current rent must remain at or below the maximum allowable rent for the unit, says Johnson. To check that this is the case, add the current rent to your log (line 11) and compare it to line 10. Line 11 should be equal to or less than line 10.
If the current rent is above the maximum allowable rent, you'll have to correct the situation in order for the owner to continue taking tax credits for the over-income unit.
Whether household fell back below 140 (or 170) percent of maximum allowable income. It's possible that a household that was over 140 (or 170) percent of the maximum allowable income last year could fall back below 140 (or 170) percent this year, says Johnson. If so, this information is entered on line 12. A household head may have lost his or her job, for instance. If the household falls back below the income limits and you have no other households above 140 (or 170) percent of the maximum allowable income, the NAU rule no longer applies, says Johnson. This will be good news that your central office or site manager will want to know.
What to Do with Log
If your staff's calculation reveals that a household is more than 140 (or 170) percent of the maximum allowable income, have them notify you immediately, says Johnson. Also, have your staff submit to you a copy of the log to double-check.
Later, you'll need to prove to auditors that you rented next available units to qualified, low-income applicants. And to maximize rental income, you'll also want to convert the over-income household's unit into a market-rate unit as soon as possible. For more information on preserving your ability to raise an over-income household's rent and other alternatives to maximize your site's earning potential in these situations, see “How to Raise Rents When Households Go Over-Income” in the December 2011 issue, and available on our Web site at www.TaxCreditHousingInsider.com.
A.J. Johnson, HCCP: President, A.J. Johnson Consulting Services, Inc., 3521 Frances Berkeley, Williamsburg, VA 23188; www.ajccs.net.
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