Prevent NAU Rule Violations Triggered by Household Composition Changes
You probably know that when a low-income household’s income exceeds 140 percent of the income limit (or 170 percent in the case of deep rent-skewed units), you must follow the Next Available Unit (NAU) rule to make sure the owner can continue claiming credits for the over-income unit. But you might not realize that changes in a household’s size can trigger the NAU rule. This can occur if a household’s size increases or decreases.
To avoid noncompliance, you must know whether to follow the NAU rule when a household’s size changes. We’ll tell you the two situations where a change in household size may cause a household to go over income. And we’ll tell you what you must do to avoid violating the NAU rule and keep the owner’s tax credits safe.
Changes in Household Composition
LIHTC rules don’t prohibit low-income households from changing. For example, if a single person were to apply for residency, qualify, move-in, and then marry, the newly married couple would be allowed to remain residents provided they completed a certification. The important question in this situation is the intent of the members of the household at the time of initial occupancy. At the time of the initial certification, tenants must accurately disclose the composition of their households in order to properly determine income eligibility.
The recertification process allows a household’s earnings to increase beyond the current maximum allowable income level. As long as the change in the household was not anticipated at the initial certification, the household is not required to re-apply under the original income limits.
Once again, the main factor is the intent of the parties at the time of initial occupancy. Intent is often difficult to determine and document. Intentionally understating or overstating the number of household members in order to meet a particular income limit is an act of fraud that will result in a finding of noncompliance. Therefore, to avoid abuse, sites can require that all new move-ins certify that there are no known or anticipated changes in the household composition during the initial six-month lease term. This can be done at move-in by requiring that each adult household member execute a sworn affidavit in the Tenant Income Certification attesting to the household composition. If you determine that the tenant purposely failed to disclose an anticipated change in the household size, whether due to the move-in or move-out of a household member, a redetermination of eligibility must be made. If the change was in any manner anticipated, then the revised household composition must be used to reevaluate initial qualification or income at move-in.
A re-calculation is not required for the move-in or move-out of a dependent child, dependent student, or unborn child, who can be added or subtracted from the household at any time. As stated in the IRS 8823 Guide, unanticipated decreases in family size don’t trigger the immediate income certification of a new household. Subsequent annual income recertifications will be based on the income of the remaining members of the household. A change in the size of a household such as with move-ins, move-outs, or substitutes of a household member is acceptable at the time of recertification; however, the NAU rule may be triggered.
Situation #1: New Adult Member Joins Household
Sometimes households ask management if they can add a new member. This often happens, for instance, when a household member is getting married and wants to continue living in her unit with her new spouse, or when a divorced household member learns she will get full custody of her child.
Income limits are based on household size, so if you add a member to a household, you’ll need to use a different income limit, beginning with that household’s next recertification. The new income limit for the larger household will be higher than what you’ve been using to certify and recertify that household. But despite this cushion, it’s still possible that the new member’s income will cause the household’s total income to exceed 140 percent of the income limit.
For example, suppose you manage a tax credit site and you must rent 20 percent of your units to households earning no more than 50 percent of area median gross income (AMGI). The household member, who lives alone in one of your low-income units, earns $11,000, which is $10,000 less than the income limit for a one-person household. The member tells you she’s getting married and asks if her husband can move into her unit. He earns $25,000 a year as a plumber. The income limit in your area for a two-person household is $24,000. One hundred forty percent of that income limit is $33,600. Because their combined income would equal $36,000, you would need to follow the next available unit rule when the husband joins the household.
Situation #2: Adult Member Leaves Household
You might not think that a household can go over income simply by losing one of its members. After all, if a household member dies, for instance, no income is added to that household’s total. And if the deceased household member had been earning income, the household’s total income will now drop as a result of the member’s death.
But losing a member can cause a household’s income to exceed 140 percent of AMGI. Remember, income limits are based on household size. So if a household member leaves, you must switch to a lower income limit at the household’s next annual certification, based on the smaller household size. Using this lower income limit makes it less likely that the household’s income will stay below the acceptable limits. And if the departing household member earned little or no income, it’s even more possible that the household’s new total income (without that member) will exceed 140 percent of AMGI.
For example, suppose a couple occupy a low-income household at a tax credit site. To be eligible for a low-income unit at that site, a household must earn no more than 50 percent of AMGI, which is $22,000 for a two-person household. They were eligible when they moved into their unit a few years ago. The husband is a full-time student and earns no income, while the wife works full-time as a teacher. Their household’s income is currently $30,000. Although this is above the limit, it’s not high enough to trigger the NAU rule (140 percent of the income limit is $30,800). The husband then files for divorce and moves away. This means that the appropriate income limit to use for the wife’s one-person household is $19,250. Because the husband left the household, the wife’s income exceeds 140 percent of the new limit ($26,950), triggering the NAU rule.