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Guide for Completing Form 8823 - page 100 / 197

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Model Units

neighborhood watch programs, and educational activities for primary school-age residents.

The adjusted basis of the unit occupied by a security officer is includable in the Eligible Basis of the building under IRC §42(d)(1) as a facility reasonably required for the benefit of the project. However, the unit is excluded from the Applicable Fraction of the building under IRC §42(c)(1)(B). The security officer is not required to be income qualified. If the owner is charging rent for the unit, the Service may determine that the unit is not reasonably required by the project because the owner is not requiring the security officer to occupy the unit as a condition of employment. (See footnote 4.) Later conversion of the unit into a residential rental unit will not change the Eligible Basis.

Model units are maintained primarily during a project’s rent-up period to show prospective tenants the desirability of the project’s units. If the project maintains full occupancy thereafter, the model can be dismantled and the unit rented. This makes economic sense because model units do not generate rental income for a project owner. However, at a large apartment complex, it is standard industry practice to continuously maintain a model unit for marketing purposes and to be competitive. The unit can be shown immediately to prospective tenants at any time without disturbing tenants in occupied units. By increasing competitiveness, model units contribute to the economic viability of the LIHC project

A model unit is considered a rental unit under IRC §42; see e.g., PLR 9330013, Issue

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    3, July 30, 1993. Therefore, a model unit’s cost is included in the building’s eligible

basis and in the denominator of the applicable fraction when determining a building’s qualified basis.

Example 1: Model Unit Never Rented as LIHC Unit

An owner included the cost of a model unit in the eligible basis for a 100% LIHC building with 49 units (other than the model unit). The owner anticipates that the model unit will be maintained throughout the compliance period and will never be rented to an income qualified household.

The cost of the unit should be included in the building’s eligible basis. However, the maximum applicable fraction that the owner can claim is 49/50, or 98%.

Example 2: Model Unit Converted to LIHC Unit

An owner included the cost of a model unit in the eligible basis for a 100% LIHC building with 49 units (other than the model unit). The owner used the unit as a model for the first three years, but in April of year four of the compliance period, the unit was rented to an income qualified tenant.

The cost of the unit should be included in the building’s eligible basis and in years one through three of the credit period, the maximum applicable fraction that the owner can claim is 49/50, or 98%. In year four and

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Revised October 2009

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