Article | What the IRS Says About Employee Security Units

Questions Posed...

A new qualified low-income building is located in an area where apartment building owners typically employ security officers due to the level of crime in the area. The owner had two questions.

1. The building is occupied by a full-time security officer for that building, and the building's owner requires the security officer to live in the unit. Is the cost of that unit includable in the building's eligible basis?
2. Is that unit a residential rental unit includable in the numerator and denominator of the building's applicable fraction?
3. What happens in the future if the unit no longer houses an employee and is rented to a low-income household?

...and the IRS says...

1. The cost of the unit can be included in the building's eligible basis. The legislative history of §42 indicates that residential rental property includes, in addition to the residential rental units, facilities for use by the tenants and other facilities reasonably required by the project. Functionally related and subordinate property is property that is reasonably required for the project. [§1.103-8(b)(4)(iii)] Examples of functionally related and subordinate property are units for resident managers or maintenance personnel. [§1.103-8(b)(4)(iii)]  Thus, while units for resident managers or maintenance personnel are not residential rental units, they are treated as part of residential rental property because these units are functionally related and subordinate to the project. The unit occupied by a full-time security officer is similar to the units described in the examples contained in tax code and is reasonably required by the project because of the level of crime in the area. [§ 1.103-8(b)(4)(iii)] Thus, the unit is functionally related and subordinate to the building. As a result, the unit is residential rental property for purposes of §42 and its adjusted basis is includable in building's eligible basis [§42(d)(1)].
2. The security employee unit is not included in the building's applicable fraction. The term "residential rental unit" has a different meaning than the term "residential rental property" for purposes of §42. Units for resident managers or maintenance personnel are residential rental property because they are functionally related and subordinate to residential rental projects, not because they are residential rental units. [§1.103-8(b)(4)(iii)] Similarly, a unit occupied by a full-time security officer is not a residential rental unit. Only residential rental units are includable in the building's applicable fraction. [§42(c)(1)(B)] 
3. If in a later year of the credit period, the unit occupied by the full-time security officer is converted to a residential rental unit, the unit will be includable in the denominator of the building's applicable fraction for that year. If the unit also becomes a low-income unit in a later year, the unit will be includable in the numerator of the building's applicable fraction for that year.

Up Next: What About a Police Substation?