Each Compliance Stoplight Test presents a real-world scenario. What color is the compliance stoplight for situation: Green Light (tax credits are safe), Yellow Light (proceed with caution), or Red Light (tax credit loss is imminent)?

Scenario

A mixed-income LIHTC property has a vacant low-income unit. No LIHTC units in the building are over-income.

While the low-income unit remains vacant, management continues customary advertising efforts to rent the unit to an income-qualified family. Before the low-income unit is rented, however, the property rents two market-rate units to market-rate families.

A compliance reviewer concludes that the property violated the Vacant Unit Rule because the market-rate units were rented before the vacant LIHTC unit was filled.

What color is the compliance stoplight?

🟢 Green Light – Tax credits are safe
🟡 Yellow Light – Proceed with Caution
🔴 Red Light – Tax credit loss imminent

Food for thought: The LIHTC unit remains vacant while two market-rate units are rented. Does that create a compliance problem?

Stoplight Reveal

🟢 Green Light – Tax credits are safe

The Vacant Unit Rule requires reasonable attempts to rent a vacant low-income unit to a qualified family. It does not require that the vacancy actually be filled before a market-rate unit may be rented.

More Details

Treas. Reg. §1.42-5(c)(1)(ix) requires an owner to make reasonable attempts to rent a vacant low-income unit, or the next available unit of comparable or smaller size, to an income-qualified family before units are rented to families that are not income-qualified. Read in isolation, that language can appear to prohibit market-rate leasing while a low-income unit remains vacant. IRS guidance makes clear that it does not.

Revenue Ruling 2004-82, Q&A 9, illustrates how that rule works. In the IRS example, multiple low-income units remained vacant when the owner rented market-rate units. The owner had used customary methods to advertise the low-income vacancies and identify prospective qualified tenants. The IRS concluded that the Vacant Unit Rule was not violated.

The important issue, therefore, is the owner's leasing effort—not which type of unit happens to rent first. Publication 5913 explains that a state agency's review of Vacant Unit Rule compliance should include the owner's advertising practices. What constitutes a reasonable effort depends on the circumstances and the customary methods of marketing apartment vacancies in the property's area.

Here, management continues customary efforts to market the vacant low-income unit to qualified families. Renting the two market-rate units first does not change the qualified status of the vacant low-income unit.

Compliance Insight

A vacant LIHTC unit does not have to be filled before a market-rate unit may be rented. What matters is whether reasonable efforts are being made to rent the LIHTC vacancy to a qualified family.

References

• Treas. Reg. §1.42-5(c)(1)(ix)
• Rev. Rul. 2004-82, Q&A 9
• IRS Publication 5913 (Rev. Jan. 2024), Category 11j – Vacant Unit Rule

Did the result surprise you? Watch for next week’s Compliance Stoplight Test.