[Federal Register Volume 62, Number 187 (Friday, September 26, 1997)]
[Rules and Regulations]
[Pages 50503-50506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25493]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8732]
RIN 1545-AT60
Available Unit Rule
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations concerning the
treatment of low-income housing units in a building that is occupied by
individuals whose incomes increase above 140 percent of the income
limitation applicable under section 42(g)(1). These regulations affect
owners of those buildings who claim the low-income housing tax credit.
DATES: These regulations are effective September 26, 1997.
For dates of applicability of these regulations, see Sec. 1.42-
15(i).
FOR FURTHER INFORMATION CONTACT: David Selig, (202) 622-3040 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On May 30, 1996, the IRS published a notice of proposed rulemaking
in the Federal Register (PS-29-95 at 61 FR 27036) proposing amendments
to the Income Tax Regulations (26 CFR part 1) under section 42(g)(2)(D)
of the Internal Revenue Code. A public hearing was scheduled for
September 17, 1996, pursuant to a notice of public hearing published
simultaneously with the notice of proposed rulemaking. However, the IRS
received no requests to speak at the public hearing, and no public
hearing was held. Written comments responding to the notice were
received. After consideration of all the comments, the proposed
regulations are adopted as revised by this Treasury decision.
Explanation of Revisions and Summary of Comments
The general rule in section 42(g)(2)(D)(i) provides that if the
income
[[Page 50504]]
of an occupant of a low-income unit increases above the income
limitation applicable under section 42(g)(1), the unit continues to be
treated as a low-income unit. This general rule only applies if the
occupant's income initially met the income limitation and the unit
continues to be rent-restricted. Section 42(g)(2)(D)(ii), however,
provides an exception to the general rule in section 42(g)(2)(D)(i).
Under this exception, the unit ceases being treated as a low-income
unit when two conditions occur. The first condition is that the
occupant's income increases above 140 percent of the income limitation
applicable under section 42(g)(1), or above 170 percent for a deep rent
skewed project described in section 142(d)(4)(B) (applicable income
limitation). When this occurs, the unit becomes an over-income unit.
The second condition is that a new occupant, whose income exceeds the
applicable income limitation (nonqualified resident), occupies any
residential unit in the building of a comparable or smaller size
(comparable unit).
Rules and Definitions
One commentator suggested that the available unit rule under the
proposed regulations did not clearly indicate whether the aggregate
income of all occupants of a unit is taken into account. Accordingly,
the final regulations clarify that an over-income unit means a low-
income unit in which the aggregate income of the occupants of the unit
increases above 140 percent of the applicable income limitation under
section 42(g)(1), or above 170 percent of the applicable income
limitation for deep rent skewed projects described in section
142(d)(4)(B).
Commentators requested that the final regulations specify whether a
comparable unit is measured by floor space or number of bedrooms. The
final regulations provide that a comparable unit must be measured by
the same method the taxpayer used to determine qualified basis for the
credit year in which the comparable unit became available.
Some commentators stated that the provision in the proposed
regulations that all available comparable units (not just the ``next
available'' unit) must be rented to qualified residents to continue
treating an over-income unit as a low-income unit is inconsistent with
the title of section 42(g)(2)(D)(ii). Although the title of that
provision uses the term next available unit, the text of the rule
provides that if any available comparable unit is occupied by a
nonqualified resident, the over-income unit ceases to be treated as a
low-income unit. This means that if a building has more than one over-
income unit, renting any available comparable unit (a comparably sized
or smaller unit) to a qualified resident preserves the status of all
over-income units as low-income units. Similarly, if any available
comparable unit is rented to a nonqualified resident, all over-income
units for which the available unit was a comparable unit lose their
status as low-income units; thus, comparably sized or larger over-
income units would lose their status as low-income units. In operation,
this means that the owner must continue to rent any available
comparable unit to a qualified resident until the percentage of low-
income units in a building (excluding the over-income units) is equal
to the percentage of low-income units on which the credit is based. At
that point, failure to maintain the over-income units as low-income
units has no immediate significance. (However, the failure to maintain
an over-income unit as a low-income unit may affect the owner's
decision of whether or not to rent a particular available unit at
market rate at a later time.) Consequently, the final regulations
provide that all available comparable units in the building, not only
the next available comparable unit, must be rented to qualified
residents to retain the low-income status of the over-income units.
Application of Rules on a Building by Building Basis
The proposed regulations provide that in a project containing more
than one low-income building, the available unit rule applies
separately to each building. Some commentators suggested that the
regulations should permit residents of over-income units to move to
available units in different buildings within the same low-income
housing project without violating the available unit rule. However,
because the requirements under section 42 must be satisfied on a
building by building basis, the final regulations provide that the
available unit rule only permits a current resident to move to another
unit within the same building of a low-income housing project.
In addition, in response to requests from several commentators, the
final regulations make clear that when a current resident moves to a
different unit within the same low-income building, the units exchange
status. (See example 2 of Sec. 1.42-15(g) of the proposed regulations
and Sec. 1.42-15(h) of the final regulations.) Thus, the newly occupied
unit adopts the status of the vacated unit, and the vacated unit
assumes the status the newly occupied unit had immediately prior to its
occupancy by the qualifying residents.
Timing Issues
The methods of committing rental units to tenants varies in
different jurisdictions. However, it is a common rental practice to
have some form of preliminary reservation for a unit prior to the date
on which a lease is signed or the unit is occupied. Thus, several
commentators have requested clarification that once a unit is reserved
for a prospective tenant, it is no longer treated as available for
purposes of the available unit rule. Accordingly, the final regulations
provide that a unit is not available for purposes of the available unit
rule when the unit is no longer available for rent due to a reservation
that is binding under local law.
Finally, financing arrangements using obligations that purport to
be exempt facility bonds under section 142 must meet the requirements
of sections 103 and 141 through 150 for interest on the obligations to
be excluded from gross income under section 103(a). The requirements
under section 142(d) may differ from those under section 42.
Accordingly, the final regulations provide that the rules under the
final regulations are not intended as an interpretation of the
applicable rules under section 142.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations, and, because these regulations do
not impose on small entities a collection of information requirement,
the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility Analysis is not required. Pursuant
to section 7805(f) of the Internal Revenue Code, the notice of proposed
rulemaking preceding these regulations was submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business.
Drafting Information: The principal author of these regulations is
David Selig, Office of the Assistant Chief Counsel (Passthroughs and
Special Industries), IRS. However, other personnel from the IRS and
Treasury Department participated in their development.
[[Page 50505]]
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.42-15 is also issued under 26 U.S.C. 42(n); * * *
Par. 2. Section 1.42-15 is added to read as follows:
Sec. 1.42-15 Available unit rule.
(a) Definitions. The following definitions apply to this section:
Applicable income limitation means the limitation applicable under
section 42(g)(1) or, for deep rent skewed projects described in section
142(d)(4)(B), 40 percent of area median gross income.
Available unit rule means the rule in section 42(g)(2)(D)(ii).
Comparable unit means a residential unit in a low-income building
that is comparably sized or smaller than an over-income unit or, for
deep rent skewed projects described in section 142(d)(4)(B), any low-
income unit. For purposes of determining whether a residential unit is
comparably sized, a comparable unit must be measured by the same method
used to determine qualified basis for the credit year in which the
comparable unit became available.
Current resident means a person who is living in the low-income
building.
Low-income unit is defined by section 42(i)(3)(A).
Nonqualified resident means a new occupant or occupants whose
aggregate income exceeds the applicable income limitation.
Over-income unit means a low-income unit in which the aggregate
income of the occupants of the unit increases above 140 percent of the
applicable income limitation under section 42(g)(1), or above 170
percent of the applicable income limitation for deep rent skewed
projects described in section 142(d)(4)(B).
Qualified resident means an occupant either whose aggregate income
(combined with the income of all other occupants of the unit) does not
exceed the applicable income limitation and who is otherwise a low-
income resident under section 42, or who is a current resident.
(b) General section 42(g)(2)(D)(i) rule. Except as provided in
paragraph (c) of this section, notwithstanding an increase in the
income of the occupants of a low-income unit above the applicable
income limitation, if the income of the occupants initially met the
applicable income limitation, and the unit continues to be rent-
restricted--
(1) The unit continues to be treated as a low-income unit; and
(2) The unit continues to be included in the numerator and the
denominator of the ratio used to determine whether a project satisfies
the applicable minimum set-aside requirement of section 42(g)(1).
(c) Exception. A unit ceases to be treated as a low-income unit if
it becomes an over-income unit and a nonqualified resident occupies any
comparable unit that is available or that subsequently becomes
available in the same low-income building. In other words, the owner of
a low-income building must rent to qualified residents all comparable
units that are available or that subsequently become available in the
same building to continue treating the over-income unit as a low-income
unit. Once the percentage of low-income units in a building (excluding
the over-income units) equals the percentage of low-income units on
which the credit is based, failure to maintain the over-income units as
low-income units has no immediate significance. The failure to maintain
the over-income units as low-income units, however, may affect the
decision of whether or not to rent a particular available unit at
market rate at a later time. A unit is not available for purposes of
the available unit rule when the unit is no longer available for rent
due to contractual arrangements that are binding under local law (for
example, a unit is not available if it is subject to a preliminary
reservation that is binding on the owner under local law prior to the
date a lease is signed or the unit is occupied).
(d) Effect of current resident moving within building. When a
current resident moves to a different unit within the building, the
newly occupied unit adopts the status of the vacated unit. Thus, if a
current resident, whose income exceeds the applicable income
limitation, moves from an over-income unit to a vacant unit in the same
building, the newly occupied unit is treated as an over-income unit.
The vacated unit assumes the status the newly occupied unit had
immediately before it was occupied by the current resident.
(e) Available unit rule applies separately to each building in a
project. In a project containing more than one low-income building, the
available unit rule applies separately to each building.
(f) Result of noncompliance with available unit rule. If any
comparable unit that is available or that subsequently becomes
available is rented to a nonqualified resident, all over-income units
for which the available unit was a comparable unit within the same
building lose their status as low-income units; thus, comparably sized
or larger over-income units would lose their status as low-income
units.
(g) Relationship to tax-exempt bond provisions. Financing
arrangements that purport to be exempt-facility bonds under section 142
must meet the requirements of sections 103 and 141 through 150 for
interest on the obligations to be excluded from gross income under
section 103(a). This section is not intended as an interpretation under
section 142.
(h) Examples. The following examples illustrate this section:
Example 1. This example illustrates noncompliance with the
available unit rule in a low-income building containing three over-
income units. On January 1, 1998, a qualified low-income housing
project, consisting of one building containing ten identically sized
residential units, received a housing credit dollar amount
allocation from a state housing credit agency for five low-income
units. By the close of 1998, the first year of the credit period,
the project satisfied the minimum set-aside requirement of section
42(g)(1)(B). Units 1, 2, 3, 4, and 5 were occupied by individuals
whose incomes did not exceed the income limitation applicable under
section 42(g)(1) and were otherwise low-income residents under
section 42. Units 6, 7, 8, and 9 were occupied by market-rate
tenants. Unit 10 was vacant. To avoid recapture of credit, the
project owner must maintain five of the units as low-income units.
On November 1, 1999, the certificates of annual income state that
annual incomes of the individuals in Units 1, 2, and 3 increased
above 140 percent of the income limitation applicable under section
42(g)(1), causing those units to become over-income units. On
November 30, 1999, Units 8 and 9 became vacant. On December 1, 1999,
the project owner rented Units 8 and 9 to qualified residents who
were not current residents at rates meeting the rent restriction
requirements of section 42(g)(2). On December 31, 1999, the project
owner rented Unit 10 to a market-rate tenant. Because Unit 10, an
available comparable unit, was leased to a market-rate tenant, Units
1, 2, and 3 ceased to be treated as low-income units. On that date,
Units 4, 5, 8, and 9 were the only remaining low-income units.
Because the project owner did not maintain five of the residential
units as low-income units, the qualified basis in the building is
reduced, and credit must be recaptured. If the project owner had
rented Unit 10 to a qualified resident who was not a current
resident,
[[Page 50506]]
eight of the units would be low-income units. At that time, Units 1,
2, and 3, the over-income units, could be rented to market-rate
tenants because the building would still contain five low-income
units.
Example 2. This example illustrates the provisions of paragraph
(d) of this section. A low-income project consists of one six-floor
building. The residential units in the building are identically
sized. The building contains two over-income units on the sixth
floor and two vacant units on the first floor. The project owner,
desiring to maintain the over-income units as low-income units,
wants to rent the available units to qualified residents. J, a
resident of one of the over-income units, wishes to occupy a unit on
the first floor. J's income has recently increased above the
applicable income limitation. The project owner permits J to move
into one of the units on the first floor. Despite J's income
exceeding the applicable income limitation, J is a qualified
resident under the available unit rule because J is a current
resident of the building. The unit newly occupied by J becomes an
over-income unit under the available unit rule. The unit vacated by
J assumes the status the newly occupied unit had immediately before
J occupied the unit. The over-income units in the building continue
to be treated as low-income units.
(i) Effective date. This section applies to leases entered into or
renewed on and after September 26, 1997.
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
Approved: August 26, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-25493 Filed 9-25-97; 8:45 am]
BILLING CODE 4830-01-U
