3. The unit is not suitable for occupancy under IRC §42(i)(3)(B)(ii). These units,
including units being rehabilitated, are considered “out of compliance.”44
noncompliance is corrected when the unit is again suitable for occupancy. The unit’s character will be determined based on the household that occupied the unit immediately preceding the rehabilitation during the first year of the credit period. See #4 on the list above.
Example 1: Units Rehabilitated During the First Year of the Credit Period
An owner acquired a building with 10 units and determined that 6 of the units (1-6) were occupied by nonqualifying households at the beginning of the first year of the credit period on January 1, 2005. Four units (7-10) were occupied by income-qualified households. The nonqualifying households moved out and the owner rehabilitated the six vacant units. Five of the rehabilitated units (1-5) were rented to new households that moved into the units in August of 2005. The sixth rehabilitated unit (6) was rented in August to an existing tenant who transferred from unit 7, one of the four units qualifying on January 1, 2005
The owner may include units 1-5, the rehabilitated units occupied by new low-income tenants in the applicable fraction computation under IRC 42(f)(2) for August, September, October, November, and December of 2005
For the tenant who transferred between units within the building, the owner may include the unrehabilitated unit 7 that the tenant occupied from January through July in the computation of the applicable fractions for those months, but the unit is no longer a low- income unit when the household moves to the rehabilitated unit 6 in August; Unit 6 is a low-income unit for August through December.
Therefore, for purposes of computing the applicable fraction for August, 2005, there are three low-income units that have not been rehabilitated (units 8, 9, and 10) and six low-income units that have been rehabilitated (units 1-6). Unit 7 is not a low-income unit.
During September, unit 7 was rehabilitated and the tenant from unit 8 moved in; therefore, unit 8 is *now considered a vacant market-rate unit.* To expedite completion of the rehabilitation of the remaining units, the owner also temporarily located the households in 9 and 10 in off-site quarters (and paid all expenses) and started rehabilitation of units 8, 9, and 10. For purposes of determining the applicable fraction for September, units 1-7 are low-income units and units 9, and 10 are out of compliance low-income unit. *Unit 8 is a market-rate unit that is being rehabilitated in September.*
44 45 *The state agency is not required to file Form 8823 to report noncompliance during the rehabilitation period.* *In the January 2007 revision of the Guide, Unit 8 was considered a low-income unit. The IRS will not challenge a taxpayer’s reliance on the January 2007 explanation for determining the status of a unit before January 1, 2010. *
Revised October 2009