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

An LIHTC property has an applicable maximum allowable rent limit for a unit of $1,249.53. The management agent’s software rounds the amount up to $1,250, and the residents are charged that amount.

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 difference is only a few cents and follows standard rounding principles. In a LinkedIn poll, the overwhelming majority voted for a red light here. 

Stoplight Reveal

🔴 Red Light – Tax credit loss imminent

Because the property charged more than the allowable rent, even by pennies, the unit would be considered out of compliance for the entire year during which the excess rent was charged.

More Details

The LIHTC rent limit is an absolute and hard ceiling, not an approximate target. Section 42 limits the gross rent that may be charged for a low-income unit. Charging even a small amount above that limit results in excess rent, which is a reportable noncompliance event. In practice, rounding errors often occur when property management software automatically rounds rents to whole dollars. While rounding down from the calculated maximum rent is acceptable, rounding up—even by a few cents—creates excess rent if full rent is charged. For this reason, LIHTC rents must always be set at or below the calculated maximum rent, even if the difference appears insignificant. The IRS also has clarified in the 8823 Guide that, once rents have been overcharged for any month, the state cannot consider it corrected until the next year. 

Compliance Insight

The LIHTC rent limit is a strict maximum and must be watched very closely.

References

• IRC §42(g)(2)
• 8823 Guide (2024) XI, F.2 and H

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