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Guide for Completing Form 8823 - page 144 / 197





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To determine whether a noncompliance event could potentially occur, the owner calculated the applicable fraction without the over-income *units* as part of the numerator. The applicable fraction is now 60 percent (6/10). To remain in compliance, Unit 10 must be rented to *an income-qualified* household *and the rents restricted* to replace one of the over-income *units*.

*An income-qualified* household moved into Unit 10 on August 1, 2000 *and paid market rate rents*. At the time of the move in, the current applicable fraction (excluding all of the over-income units) was 60 percent. The event triggered a *violation of the* Available Unit Rule. All the over- income units cease to be treated as low-income units. The date of noncompliance is August 1, 2000.

Example 2: Comparable Units

*A mixed-use* building, with an applicable fraction of 85 percent, contains 85 *low-income* units and 15 market rate units. Eleven of the low-income units are occupied by households with incomes that have increased above 140 percent of the income limit. The eleven over-income units consist of 4 three-bedroom, 5 two-bedroom, and 2 one-bedroom units. The next unit to be vacated is #99, a two-bedroom unit (not one of the eleven over-income units). The vacated unit is leased to a *nonqualified household at market rate rent.*

The building is out of compliance. To comply with the Available Unit Rule, the unit should have been leased to an *income-qualified* household *and the rents should have been restricted*. Because the unit was leased to a *nonqualifying* tenant, all over-income units, for which #99 was a comparable or larger-sized unit, lose their status as low-income units. Thus, all 4 of the three-bedroom and all 5 of the two-bedroom units of the over- income units are out of compliance. The 2 one-bedroom units (which are smaller than the rented unit) are not out of compliance (See Treas. Reg. §1.42-15(f).)

*100% LIHC Projects: Owner Fails to Demonstrate Due Diligence*

The Available Unit Rule is also violated when an owner of a 100% LIHC project fails to rent a unit to an income-qualified household and cannot demonstrate due diligence when completing the initial income certification. The rule is also violated if the owner deliberately rents a unit as a market-rate unit. 4

Example 1: Owner of 100% LIHC Project Fails to Demonstrate Due Diligence

A state agency conducts a tenant file review for a 100% low-income project and determines that numerous errors were made when identifying source of income and completing third party verification as part of the initial income certifications after July 30, 2008. In some cases, certifications were not completed for months after the households moved in. The state agency reviewed the owner’s due diligence and determined that the owner did not

4 *To avoid noncompliance, the owner must first determine which units are over-income units and apply the Available Unit Rule accordingly. Reducing the number of low-income units in a building will reduce the allowable credit and is a credit recapture event under IRC §42(j).*

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Revised October 2009

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