As I indicated in a memo I sent to clients on November 7, 2014, the IRS will not consider the charging of rent or utilities for employee or security officer units to be an audit issue. This position is stated in the IRS Section 42 Audit Guide.
The IRS recently released to the public a Chief Counsel Memorandum dated June 2, 2014 in which the Chief Counsel stated “Charging resident managers or maintenance personnel rents, utilities, or both for units in a qualified low-income building does not make the units residential rental units and not facilities reasonably required for the project under §1.103-8(b)(4)(iii).”
The memorandum goes on to state, “The character and size of a project are, among other things, relevant in determining whether any property, including an employee-occupied unit, is functionally related and subordinate to the project…”
The memorandum also confirms that such units are not considered residential rental units but facilities reasonably required for the project. For this reason, the general public use requirement does not apply to such units.
Clearly, the key issue for the IRS is whether the units meet the “facility reasonably required” test. Based on this, I strongly recommend obtaining HFA approval prior to setting any unit aside as an employee (or security officer) unit. I also recommend that – despite the IRS position – rent not be charged to such units unless approved by your HFA.