Characterization of Employee Units When Charging Rent, Utilities

The IRS recently released a memorandum issued by the Office of Chief Counsel dated June 2, 2014, which addressed circumstances that could affect the eligibility of employee units such as manager or maintenance personnel units in a LIHTC site to qualify for the tax credit. Specifically, the memo discussed the effect of charging rent to resident managers and maintenance personnel and whether, by doing so, those units could be characterized as “residential rental units.”

The memo constitutes legal advice, signed by attorneys in the National Office of the Office of Chief Counsel and issued to Internal Revenue Service personnel who are national program executives and managers. Memos are issued to assist IRS personnel in administering their programs by providing authoritative legal opinions on certain matters, such as industry-wide issues. However, these technical advice memoranda cannot be used or cited as precedent.

Public Use Requirement Issue

Section 1.42-9 of the Internal Revenue Code regulations provide that, if a resident rental unit in a building is not for use by the general public, the unit is not eligible for a Section 42 credit. And Section 1.42-9(b) provides that, if a residential rental unit is provided only for a member of a social organization or provided by an employer for its employees, the unit is not for the use by the general public and is not eligible for credit under Section 42.

Since the general public use requirement doesn’t allow the housing credit to apply to units that are not being used by the general public, the question was whether or not employee units such as manager and maintenance personnel units are subject to this requirement and if charging rent or utilities to employees for the units made a difference in the analysis.

Facilities Reasonably Required for the Site

In the memo, the IRS Office of Chief Counsel said that low-income units rented to resident managers or maintenance personnel are not residential rental units. Rather, they’re facilities reasonably required for the development.

Therefore, the general public use rules do not apply to those units and the cost of the units can be included in the eligible basis for the purposes of the low-income housing tax credit. This characterization is not dependent on whether the resident manager or employees are charged for rent or utilities.

“In other words, charging rents, utilities, or both for units for resident managers or maintenance personnel in a qualified low-income building does not make such units residential rental units and not facilities reasonably required for the project. The character and size of the project are, among other things, relevant in determining whether any property, including an employee-occupied unit is functionally related and subordinate to the project,” the memo states.

Section 42 Audit Technique Guide

The Section 42 Audit Guide that was released in September 2014 echoes the advice given in this memo. The Audit Guide states that the cost of employee units at a LIHTC site is includable in eligible basis, but is excluded from the applicable fraction. In effect, this makes the employee unit a common area.

The Guide also points out that payment of rent, utilities, or both by an employee does not preclude the unit from being considered an employee unit. The memo and the Audit Guide together indicate that the characterization of an employee unit is more dependent on the need for the unit and the services provided than whether or not the employee is charged rent or utilities.