Available Unit Rule

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[PS-29-95]

RIN 1545-AT60

Available Unit Rule

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations concerning the

low-income housing credit. The proposed regulations provide rules for

determining the treatment of low-income housing units in a building

that are occupied by individuals whose incomes increase above 140

percent of the income limitation applicable under section 42(g)(1). The

proposed regulations affect owners of those buildings. This document

also provides notice of public hearing on these proposed regulations.

DATES: Written comments and outlines of topics to be discussed at the

public hearing scheduled for September 17, 1996, must be received by

August 28, 1996.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (PS-29-95), room 5228,

Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,

DC 20044. In the alternative, submissions may be hand delivered between

the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (PS-29-95), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,

Washington, DC. The public hearing will be held in the NYU Classroom,

room 2615, Internal Revenue Building, 1111 Constitution Avenue, NW.,

Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, David

Selig, (202) 622-3040; concerning submissions and the hearing,

Christina Vasquez, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Income Tax

Regulations (26 CFR Part 1) under section 42. These amendments are

proposed to provide guidance under section 42(g)(2)(D), as amended by

section 7108(e)(1) of the Omnibus Budget and Reconciliation Act of

1989, and section 11701(a)(3)(A) and (a)(4) of the Omnibus Budget and

Reconciliation Act of 1990. Section 42(g)(2)(D) provides rules for

determining the treatment of low-income housing units that are occupied

by individuals whose incomes rise above the income limitation

applicable under section 42(g)(1).

The general rule in section 42(g)(2)(D)(i) provides that if the

income 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).

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 resident, whose income exceeds the applicable income

limitation (nonqualified resident), occupies any residential unit in

the building of a comparable or smaller size (comparable unit).

Explanation of Provisions

All Available Units Must Be Rented to Qualified Residents

The heading of section 42(g)(2)(D)(ii) indicates that the next

available unit must be rented to a low-income tenant to maintain the

low-income status of an over-income unit. Although the heading of

section 42(g)(2)(D)(ii) refers to the next available unit, the body of

section 42(g)(2)(D)(ii) clarifies 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. Therefore, all available comparable

units in the building, not only the next available unit, must be rented

to qualified residents to maintain the low-income status of the over-

income unit.

A Current Resident May Move Within the Same Low-Income Building

The proposed regulations define a qualified resident under the

available unit rule as any person whose income does not exceed the

applicable income limitation or any current resident, regardless of the

income level of the current resident. Thus, a current resident may move

to a different unit in the same low-income building without causing a

violation of the available unit rule even if the current resident's

income exceeds the applicable income limitation. When a current

resident moves to a different unit within the same low-income building,

the new unit adopts the status of the vacated unit.

Rule Applies to Each Building Separately

The rules of section 42 generally apply on a building-by-building

basis. For example, the amount of credit allowable under section 42(a)

is determined for each building in a qualified low-income housing

project. The recapture of credit under section 42(j) is determined by

examining the qualified basis of each building. In addition, section

42(g)(2)(D)(ii) uses the phrase ``any residential rental unit in the

building'' to identify residential rental units that must be rented to

qualified residents to preserve the low-income status of an over-income

unit. The proposed regulations provide, therefore, that in a project

containing more than one low-income building, the available unit rule

applies separately to each building.

Effect of Violation of Available Unit Rule

The proposed regulations further provide that all over-income units

in the building lose their status as low-income units if an owner

violates the available unit rule. A violation of the rule occurs when a

building has one or more over-income units and the owner of the

building rents an available comparable unit in the building to a

nonqualified resident.

Over-Income Unit Counts Toward Minimum Set-Aside Requirement

The proposed regulations also clarify whether an over-income unit

counts towards satisfying the applicable minimum set-aside requirement

of section 42(g)(1). The available unit rule provides that an over-

income unit maintains its status as a low-income unit as long as the

owner does not rent an available comparable unit to a nonqualified

resident. Section 42(i)(3), which defines a low-income unit, and

section 42(g)(2)(D), which contains rules

[[Page 27037]]

for increases in the income of existing low-income tenants, work

together to treat an over-income unit as a low-income unit when

determining whether a project satisfies the applicable minimum set-

aside requirement. This treatment helps diminish any incentive a

project owner may have to evict from a rent-restricted unit those

tenants who originally qualified as low-income tenants. See 2 H.R.

Conf. Rep. No. 841, 99th Cong., 2d Sess. II-97 (1986), 1986-3 (Vol. 4)

C.B. 97. Therefore, the proposed regulations provide that an over-

income unit may continue 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).

Relationship to Tax-Exempt Bond Provisions

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. For example, section

142(d)(1) is applied on a project rather than on a building-by-building

basis. The rules set forth in these proposed regulations are not

intended as an interpretation of the applicable rules under section

142.

The rules contained in the proposed regulations are proposed to be

effective on the date final regulations are published in the Federal

Register.

Special Analyses

It has been determined that this notice of proposed rulemaking 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and, therefore, a Regulatory

Flexibility Analysis is not required. Pursuant to section 7805(f) of

the Internal Revenue Code, this notice of proposed rulemaking will be

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight (8) copies) that are submitted timely to the IRS. All

comments will be available for public inspection and copying.

A public hearing has been scheduled for September 17, 1996, at 10

a.m. in the NYU Classroom, room 2615, Internal Revenue Building, 1111

Constitution Avenue, NW., Washington, DC. Because of access

restrictions, visitors will not be admitted beyond the Internal Revenue

Building lobby more than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written comments and outlines of topics to be discussed and the

time devoted to each topic (signed original and eight (8) copies by

August 28, 1996.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

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.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding

a new citation 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.

Low-income resident means a person whose income does not exceed the

applicable income limitation.

Low-income unit is defined by section 42(i)(3)(A).

New resident means a person who currently is not living in the low-

income building.

Nonqualified resident means a new resident whose income exceeds the

applicable income limitation.

Over-income unit means a low-income unit in which the 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 a low-income resident or 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. Thus, to continue treating

the over-income unit as a low-income unit, 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.

(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.

[[Page 27038]]

(e) Buildings accounted for separately. In a project containing

more than one low-income building, the available unit rule applies

separately to each building.

(f) Result of violation of available unit rule. If any comparable

unit that subsequently becomes available is rented to a nonqualified

resident, all over-income units within the same building lose their

status as low-income units.

(g) Examples. The following examples illustrate this section.

Example 1. This example illustrates a violation of the available

unit rule in a low-income building containing three over-income

units. On January 1, 1997, 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. To avoid recapture of credit, the Project owner must maintain

five of the units as low-income units. 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) (low-income

residents). Units 6, 7, 8, and 9 were occupied by market-rate

tenants. Unit 10 was vacant. On November 21, 1997, the 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,

1997, Units 8 and 9 became vacant. On December 1, 1997, the project

owner rented Units 8 and 9 to qualified residents at rates meeting

the rent restriction requirements of section 42(g)(2). On December

31, 1997, 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, eight of the units would be low-income units. Units 1, 2,

and 3, the over-income units, could then 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 the increase in

J's income, J is a qualified resident under the available unit rule

because J is a current resident of the building. The unit occupied

by J becomes an over-income unit under the available unit rule. The

over-income units in the building continue to be treated as low-

income units.

(h) Effective date. This section is effective on the date final

regulations are published in the Federal Register.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 96-13297 Filed 5-29-96; 8:45 am]

BILLING CODE [4830-01-U]