If the noncompliance is the result of noncompliance with the utility allowance requirements, the error should be noted under category 11m, Owner did not properly calculate utility allowance.
If the noncompliance is the result of a systemic error, also evaluate whether the minimum set-aside under IRC §42(g)(1) was met. See chapter 9.
Example 4: Tenant Income Rises Above Limit
A household was initially income qualified and moved into a unit on 1/1/2000. The maximum LIHC gross rent is $500. At recertification, the owner increased the rent to the market rate of $1,000.
The unit is out of compliance, beginning on the date the rent was increased above the maximum of $500.*
Back in Compliance
*Once a unit is determined to be out of compliance with the rent limits, the unit ceases to be a low-income unit for the remainder of the owner’s tax year. A unit is back in compliance *on the first day of the owner’s next tax year if the rent charged on a monthly basis does not exceed the limit.* An owner cannot avoid the disallowance of the LIHC by rebating excess rent *or fees* to the affected tenants.
Example 1: Overcharged Rent
The owner *of a 100% LIHC building* leased all the units to IRC §42 eligible tenants during *2007,* the third year of the credit period. However, the owner inadvertently overcharged rent to tenants occupying 3 bedroom apartments. The error impacted 15 out of 75 units. *The owner is a calendar year taxpayer.* *The Applicable Fraction for 2007 is 60/75, which equals 80 percent.* The unit is back in compliance *on January 1, 2008 if* the owner correctly limits the rent for all units.
Example 2: Overcharged Rent Impacted Minimum Set-Aside
The owner leased the rental units in a 100% LIHC building to IRC §42 eligible tenants by the end of the first year of the credit period. However, the owner overcharged rent for all the units and, as a result, failed to meet the minimum set-aside for the first year of the credit period.
The building does not qualify for LIHC.
Rev. Rul. 91-38, 1991-2 C.B. 3.
Rev. Rul. 98-47, 1998-2 C.B. 399.
Rev. Rul. 2004-82, 2004-35 I.R.B 350.
Revised October 2009