Must a Tax Credit Unit be a Tenant’s Only Residence?
I get asked the question above fairly often, and I always reply, “yes,” without ever providing a regulatory or statutory source for that answer. So, in order to ensure my clients that I am just not making things up, I thought that a general discussion of why I take the position that a tax credit unit must be a resident’s only residence is sound.
HUD guidance for the Section 8 program is very clear that a Section 8 unit must be the only residence for a Section 8 resident (see paragraph 13 of the HUD Model Lease for Subsidized Programs). However, as with many elements of the LIHTC program, issues are not as clearly defined relative to occupancy requirements. In fact, to confirm that a tax credit unit must be a tenant’s sole place of residence, we have to rely on references to sections of the Internal Revenue Code that are not tax credit specific.
The term “residential rental property” generally as the same meaning for the LIHTC program as for housing financed by tax-exempt bonds. For specific guidance on this, please see the Conference Committee Report to the 1986 Act, CCH Paragraph 7252, and The General Explanation to the Tax Reform Act of 1986, page 157. See also Revenue Ruling 98-47. Section 42 itself also leads us to this definition in §42(g)(1), which states, “A qualified low-income housing project means any project for residential rental property.” This is the identical language contained in IRC §142(d)(1), which is the section of the Code governing tax-exempt bonds. §1.103-8(b)(5)(i), which are part of the Treasury Regulations implementing §142, provides that individuals or families of low or moderate-income must occupy that percentage of completed units in such project applicable to the project under §1.103-8(b)(1) continuously during the project period.
It is this regulatory language regarding “continuous” occupancy that leads me to provide the opinion that once a resident enters into a lease for a tax credit unit, such unit may be their only residence. If they were to maintain a second residence, then they would not be in “continuous” occupancy of the low-income unit, and the unit would not be considered low-income.
Based on this continuous occupancy requirement, I recommend strongly that all leases for LIHTC properties contain language similar to the language in the HUD Model lease. An example of such a clause would be “The tenant must live in the unit and the unit must be the tenant’s only place of residence. The Tenant shall use the premises only as a private dwelling for himself/herself and the individuals listed on the Tenant Income Certification. The Tenant agrees to permit other individuals to reside in the unit only after obtaining the prior written approval of the Landlord.”
In order to ensure that LIHTC units meet the IRC definition of “residential rental property,” it is important that the continuous occupancy requirements of the program be met.