Avoid Eight Mistakes that Disqualify Low-Income Units

To qualify your site for the tax credit program, you must lease up enough units to qualified low-income households. But those units don’t automatically stay low-income for the rest of the compliance period. As a tax credit site’s manager, you must follow rules to make sure units stay low-income. If you make mistakes, you might disqualify some units, which means the owner may no longer be entitled to claim credits for them. This could lead to major problems if your site ends up with too few qualified low-income units to maintain its minimum set-aside.

We’ll tell you about eight common mistakes tax credit managers make that could result in disqualifying units’ low-income status. And we’ll tell you how you can avoid making these costly mistakes at your tax credit site.

Mistake #1: Granting Households’ Transfer Requests Without Considering Effect on Tax Credits

Many managers don’t realize that moving households to different units can affect whether units stay qualified as low income. As a result, they mistakenly grant transfer requests without first considering the tax credit ramifications.

How to avoid. If you let a household move to a different unit, the unit transfer rule will determine the status of the household’s old and new units. So make sure you understand how the rule applies to a requested transfer before you grant it.

If you transfer a household to another unit in the same building, the two units simply swap status. When the transfer occurs between different buildings in the same project, a similar rule applies as long as the tenant’s income did not exceed 140 percent of AMI at the most recent certification.

However, if you transfer a low-income household to a unit in a different building at your site that’s not in the same project, you must treat that household as a new low-income household. If on the Form 8609 the owner elected so say “No” to line 8b, then the owner has chosen to treat each BIN as a separate project. In this case, you must perform a new initial certification to determine whether the household’s income is low enough to qualify for a low-income unit in the other building.

You may discover that a household won’t be qualified, which means that you’ll put the owner’s tax credits in jeopardy if you grant the transfer request. To avoid disqualifying the unit, you should deny the request and let the household continue to occupy its current unit. Remember, low-income households that remain in the same unit stay income-eligible even if their incomes exceed the limits following their initial certifications.

It’s also important to note that during the initial credit period, existing tenants cannot be relocated for purposes of qualifying more than one LIHTC unit to count toward the minimum set-aside or applicable fraction. And under no circumstances can one household be used to initially qualify more than one tax credit unit in the project.

Mistake #2: Not Responding to Changes in Income Limits and Utility Allowances

Some tax credit managers aren’t on the lookout for changes in income limits and utility allowances. Or they don’t respond promptly to reflect the new limits or allowances in their income and rent calculations. This can jeopardize your low-income units in a few ways.

If the income limits you use to recertify a household are too high, you may not realize that a household’s income exceeds 140 percent of the income limits, and you won’t know to follow the next available unit (NAU) rule. As a result, you might not monitor your move-ins properly to ensure renting to a low-income household, increasing the risk that you’ll lose one or more of your low-income units.

Using too-high income limits can also cause you to charge too much rent for your low-income units. Tax credit rent is based on the income limits—not on a household’s actual income. If you charge a household more than the tax credit rent to occupy a unit, you can’t continue to count that unit as low-income.

Not checking for changes in utility allowances can also lead you to charge too much rent for your low-income units. When calculating a household’s rent, you must subtract the household’s utility allowance to determine the maximum amount you may charge that household. If a household’s utility allowance rises but you don’t lower the rent accordingly, you’ll charge more than the maximum rent for the unit and won’t be able to count it as low-income.

How to avoid. Check for changes in both income limits and utility allowances. To make sure your units stay low-income, you must recertify your households using the correct income limits and charge them the correct tax credit rents.

HUD releases new income limits during the early part of each year. This year, however, due in part to the regulatory freeze and transition to a new administration, income limits were not released until April 14. And of the Fiscal Year Median Family Income estimates and Income Limits HUD releases each year, LIHTC sites should use the Multifamily Tax Subsidy Project Income Limits available at https://www.huduser.gov/portal/datasets/mtsp.html.

You must switch to using the new income limits for certifying and recertifying households and calculating rents no later than 45 days after the new limits are released. Don’t wait until it’s time to renew a household’s lease before applying the new income limits.

Utility allowances can change more often. If utility allowances go up, you have 90 days to lower the rent accordingly—even if the household’s lease isn’t up for renewal.

Mistake #3: Letting Market-Rate Households Occupy Vacant Units

Not knowing how the vacant unit rule works can also cause some tax credit managers to disqualify their low-income units. A “vacant unit” is an unoccupied unit that a qualified low-income household has vacated. The tax credit law lets owners continue to count vacant units as low-income if they follow the vacant unit rule.

Generally, this rule says that you must make reasonable attempts to re-rent a vacant unit—and all other units of comparable or smaller size at your site that later become vacant—to new qualified low-income households. So if, for instance, you don’t even try to find a new qualified household for a low-income unit that goes vacant, you can’t continue to count that unit as low income. You’ll also disqualify a vacant unit if you let a market-rate household move into it.

How to avoid. Make sure you follow the vacant unit rule each time a household vacates a low-income unit. If you find that your staff members aren’t familiar with this rule, give them more training to get them up to speed.

Mistake #4: Reserving Low-Income Units for Members of Certain Social Organizations

The tax credit law requires you to keep your site “open to the general public.” And the regulations on public use warn that if a unit is available only to members of a social organization, the unit isn’t for use by the general public. This could disqualify the unit.

How to avoid. Keep your low-income units open to the general public by selecting qualified applicants without granting any preferences to applicants who belong to any particular social organization.

Mistake #5: Violating Federal, State, or Local Fair Housing Law

If you violate federal, state, or local fair housing law, your state housing agency must report the violation to the IRS as tax credit noncompliance. And your state housing agency may find that you’ve also violated the tax credit law’s public use requirement with respect to one or more of your low-income units. This could threaten the units’ status as low income.

How to avoid. Make sure your staff members are up to speed on fair housing law so that you treat prospects and residents fairly and avoid violations. The Fair Housing Act bans discrimination based on race, color, religion, national origin, sex, disability, and familial status. And your state or municipality may add further protections, such as a ban on discrimination based on age, source of income, or sexual orientation. If you’re not sure which laws apply to your tax credit site, consult your attorney.

Mistake #6: Letting Households Sublet Their Units

Managers sometimes make the mistake of letting low-income households sublet their units, without considering the possible tax credit consequences. The tax credit law doesn’t specifically ban subletting, but it’s not smart to let your households sublet. When you recertify households, you’re recertifying the household members’ income. But if households sublet their units, your low-income units are then occupied by people you haven’t certified as eligible to occupy a low-income unit. This could cause your state housing agency to tell you that you can’t continue to count these units as low-income.

How to avoid. It’s a good idea to ban subletting in your lease to avoid disqualifying your low-income units. For a Model Lease Clause you can adapt and use, see “How to Prevent or End Sublets that Endanger Tax Credits,” on our website.

Mistake #7: Ignoring Upkeep of Unoccupied Units

Most tax credit managers know that the tax credit law says units must be “suitable for occupancy.” But not all managers realize that this requirement applies to all the units at a site—even if they’re unoccupied. When a qualified low-income household vacates its unit, that unit is considered a “vacant unit.” The owner can keep claiming its credits for that unit so long as it makes reasonable attempts to re-rent it to a new qualified low-income household. When a unit is unoccupied, you may think it’s okay to postpone maintenance and needed repairs until days before you’re about to re-rent it. But to keep the unit qualified as low income, you must keep it suitable for occupancy at all times.

How to avoid. Have your staff maintain your unoccupied low-income units the same as they would if those units were occupied. And don’t delay any needed repairs.

Mistake #8: Renting Low-Income Units to Companies

Don’t make the mistake of renting a low-income unit to a company. Doing so will disqualify that unit. Although you may have some commercial space at a tax credit site, your low-income units must be kept residential. The tax credit law says that low-income units must be “occupied by” qualified low-income households. And your state housing agency may also require that occupants’ names appear on the lease. So even renting a low-income unit to a company that will place qualified residents in the unit is a bad idea.

How to avoid. When households vacate low-income units during the compliance period, re-rent the units only to individuals. It’s okay to market to a company’s employees and rent to them, as long as each employee appears on the lease and pays the rent. But if you rent low-income units direct to a company, you won’t be able to continue counting those units as low income.