In LIHTC compliance, the difference between a harmless practice and a serious violation can come down to a single regulatory detail.

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 family applies for an LIHTC unit. Every member of the family is a full-time student. A foster child will live in the unit. The foster child is also a full-time student. Management determines the unit qualifies under the foster child exception to the LIHTC student rule and approves the family for the unit.

What color is the compliance stoplight?

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

Many compliance professionals assume this situation is a Green Light because the presence of a foster child appears to satisfy a student-rule exception.

Stoplight Reveal

🔴 Red Light – Tax credit loss imminent

A foster child living in the unit does not create a valid student-rule exception under Section 42. Because every occupant is a full-time student and no statutory exception applies, the unit is not eligible as a qualified low-income unit at move-in.

More Details

The LIHTC student rule applies to the individuals counted as family members for eligibility purposes. Individuals who live in the unit but are not treated as family members under LIHTC rules—such as foster children or live-in aides—may affect occupancy standards or unit size but generally do not change the student-rule analysis.

Even if a foster child were counted for purposes of the student-rule analysis, the Section 42 exceptions are narrowly defined. One exception applies to a student who was formerly under the care and placement responsibility of a state foster care agency. However, Section 42 does not create a general exception merely because a current foster child resides in the unit. As a result, the presence of a foster child does not prevent the unit from being considered entirely occupied by full-time students if all occupants are full-time students and no statutory exception otherwise applies.

Compliance Insight

A foster child living in the unit does not, by itself, create a valid student-rule exception under Section 42.

Closing

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

References

• IRC §42(i)(3)(D)
• 8823 Guide (2024) XIII.A