Send Letter to Households to Discourage “Transient Unit Rule” Violations

As a tax credit manager, you probably know that you can violate the “transient unit rule” if you rent units to low-income households on a transient basis. The IRS presumes that you’re complying with the rule if your initial leases with households are for a term of at least six months. If one of your households vacates its unit before six months have passed, you won’t be automatically charged with a violation. But to avoid getting cited for noncompliance, you may have to prove to your state housing agency that you didn’t intend to rent the unit on a transient basis. If you can’t prove this, the IRS could deny the owner its tax credits for all noncomplying units.

With so much at stake, it’s important to do what you can to discourage households from breaking their leases in their first six months of occupancy. If you learn that a household wants to break its lease before six months are up, send the household a letter reminding it of the lease requirements and showing your intent to enforce them. This will help document the fact that you never intended to rent the unit on a transient basis. We’ll give you a Model Letter: Send Letter to Discourage Lease Breaking, that you can adapt and use for this purpose.

‘Transient Unit Rule’ Basics

The owner of your site can claim credits only for units that are considered low-income under the tax credit law. To qualify as low-income, a unit must be leased on a nontransient basis. This rule prevents tax credit sites from being used for short-term housing. It also ensures that owners don’t cheat in meeting their site’s minimum set-aside by moving households around after a few months, explains Michael Kotin of Kay-Kay Realty, a tax credit management and consulting firm. The transient unit rule has exceptions for specific types of homeless shelters and single-room occupancy units (SROs). But generally speaking, the IRS will presume that a rental isn’t transient if the household commits to an initial lease term of at least six months, he says.

You aren’t likely to get in trouble for the occasional household that abandons a low-income unit or breaks its lease because of financial hardship or another valid reason. But state housing agencies may raise questions if households at your tax credit site often move out before six months have passed.

How Letter Can Help

If you learn that a household wants to skip out early, send a letter to the household head to discourage the household from leaving and to assert your rights under the lease. Although you can’t force a household to stay, your letter may cause the household to reconsider. And if a household skips out early despite your letter, the fact that you sent the letter will help show that you never intended to rent the unit on a transient basis.

What Letter Should Say

Your letter, like our Model Letter, should say that:

• You’ve learned that the household is considering breaking its lease;
• The lease doesn’t provide for early termination, cancellation, or modification of the lease term;
• You consider the lease obligations to be in full force;
• You aren’t consenting to the household’s moving out before the lease has expired; and
• The household will still have to pay rent for the unit until the end of the lease term. Mention the lease’s expiration date in your letter.

Keep copies of all letters you send. After you send a letter to a household that may skip, make sure you keep a copy in the household file. This way, if the household skips, you’ll be able to show your state housing agency during an audit that you took the transient unit rule seriously by discouraging households from skipping out early.

Don’t throw away your letters—even if they convince households to stay. If, in the future, a household skips despite your letter, your past letters to other households will help you show your state housing agency that you have a policy of discouraging households from skipping out early. This will help prove you don’t rent units on a transient basis, which will keep the owner’s tax credits safe.

Insider Source

Michael Kotin, HCCP: Principal, Kay-Kay Realty Corp., 6908 E. Thomas, Ste. 300, Scottsdale, AZ 85251; www.kay-kayrealty.com.