Returnees to Renovated Units Must be 'Swapped In'

The IRS issued Revenue Ruling 2004-82 to address questions about residents who were relocated to new units because their original units required renovation, but who seek return, when renovation is complete, to the units they previously occupied.

The ruling states that if you, as a site owner or manager, transfer a qualified household to another unit, whether in the same building or in a different one, and if the unit into which the household will transfer has not yet been made part of that building’s applicable fraction, the transfer is considered a swap [IRS Revenue Ruling 2004-82, page 14, question #8].

The reason is that the qualifying household may not qualify for more than one unit at a time, says affordable housing consultant Elizabeth Moreland, an expert in the low income housing tax credit (LIHTC) program. The transfer can be accomplished, but it means that you’re saddled with “swap status.”

For example, suppose John Doe, who resides in unit 1 in building A (Unit 1A), wants to transfer to unit B in building B (Unit 2B) while Unit 1A is being renovated. John is a qualified resident, so Unit 1A is a qualified tax credit unit and part of building A’s applicable fraction. Unit 2B, which was recently renovated, has not yet had a qualified household residing in it, so it is not yet part of building B’s applicable fraction calculation.

Prior to Revenue Ruling 2004-82, if the transfer went through, John Doe was considered a move-out, and he would have had to qualify all over again for Unit 2B. If he qualified again, then Unit 1A would be a vacant tax credit unit and would remain part of building A’s applicable fraction. Unit 2B would become a qualified unit and become part of building B’s applicable fraction for the first time. Therefore, John Doe has qualified for two units simultaneously, which Revenue Ruling 2004-82 says is unacceptable. Therefore, a transfer under such circumstances is a “swap,” the IRS says.

Applying the IRS interpretation to John Doe’s situation, the transferring household’s status (namely, John Doe’s) as a qualified tax credit household travels with him to Unit 2B and labels the unit “qualified,” thereby making it a part of building B’s applicable fraction. However, Unit 1A’s status would also change from being a qualified, labeled unit to a never-leased or never-labeled unit, as that was the status of Unit 2B that it adopted when the swap occurred.

A round-trip transfer of residents from their units and back after renovation means you must be careful to handle the applicable fraction issue appropriately. Many owners and managers do the following: First, they accomplish the transfer, and second, they have a new household ready to occupy the unit being vacated so that it doesn’t lose its tax credit status under the LIHTC program.

Revenue Ruling 2004-82 discusses the timing of the status change. The ruling permits you to accomplish the swap prior to preparing the old unit for a new household and to move a qualified household into the old unit subsequently, so as not to affect the building’s applicable fraction.

Source: Elizabeth Moreland, President, Elizabeth Moreland Consulting Services, Inc., Middleton, WI