Scenario

In a mixed-income LIHTC building, several income-qualified families occupy two-bedroom low-income units. At annual recertification, their incomes have increased above 140% of the applicable income limitation. A larger three-bedroom market-rate unit in the same building becomes available. The owner rents the three-bedroom unit to a new market-rate family.

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: Once the Available Unit Rule applies, should every later vacancy be rented to an income-qualified family?

Stoplight Reveal

🟢 Green Light – Tax credits are safe

The Available Unit Rule applies to available units that are comparable in size to or smaller than an over-income unit. This unit is larger and not comparable, so renting it at market does not violate the rule.

More Details

IRC §42(g)(2)(D) allows a properly qualified LIHTC unit to continue as a low-income unit after the family’s income rises above 140% of the applicable income limitation, provided the rent remains restricted and the Available Unit Rule (AUR) is satisfied.

To continue treating an over-income unit as a low-income unit, the AUR generally requires comparable or smaller units in the same building to be rented to income-qualified families as they become available until the building’s applicable fraction is restored. For this purpose, comparability is measured using the same method used to determine qualified basis. IRS guidance also notes that bedroom count and comparable amenities may be used as a practical guide, but bedroom count alone is not the regulatory test.

Here, the available unit is a larger three-bedroom unit. Because it is not comparable in size to or smaller than the over-income two-bedroom units, renting it to a market-rate family does not cause those units to lose their low-income status.

Compliance Insight

Under the Available Unit Rule, size—not simply vacancy order—determines which available units must be rented to qualified families.

References

• IRC §42(g)(2)(D)(ii)
• Treas. Reg. §1.42-15(a)–(c)
• IRS Publication 5913 (Rev. Jan. 2024), Category 11i, A.4–A.6

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