The ability of a Low-Income Housing Tax Credit (LIHTC) project to utilize an apartment as a resident manager unit was established by IRS Revenue Ruling 92-61 – way back in 1992. The ruling established that the adjusted basis of a unit occupied by a full-time resident manager in included in the eligible basis of a qualified low-income building under Section 42(d)(1) of the Code, but the unit is excluded from the applicable fraction of the building for purposes of determining qualified basis. This essentially allows a unit to be used as a resident manager’s unit without decreasing the credit available to a building.
The IRS considers such units to be residential rental “space,” as opposed to a residential rental “unit.” Thus, the treatment of the unit is similar to the treatment of common area.
Manager units have traditionally been handled in two ways for LIHTC projects.
- The unit is considered common area (as noted above) or other area reasonably required by the project and the use of the unit supports property operations. Under this method, as noted above, the unit is included in the eligible basis of the building but is excluded from the buildings applicable fraction. For example, a 100-unit building with 100 low-income units has an applicable fraction of 100%. If the same building has an approved employee unit, there are now 99 total units and 99 low-income units and the 100% applicable fraction is maintained. In this case, the income of the employee living in the unit is irrelevant, as is any rent paid by the employee (although it is recommended that any rent charged by approved by the appropriate Housing Finance Agency [HFA]).
- The unit may be occupied by an employee who is also a qualified low-income resident and the unit may be considered a low-income unit. In this case, the unit is included in the building’s applicable fraction.
If an owner wants to set aside a unit as an employee unit under sceario #1 above, I make three general recommendations:
- Obtain HFA approval. While some states do not require a formal approval, there are many that do. Some states (e.g., California) require approval even when the size and location of the unit changes. All such approvals should be in writing.
- While the IRS will not make the charging of rent on an employee unit an audit issue, it is up to the HFA as to whether rent may be charged. So, as with the use of the unit itself, any proposed charges to the employee should be approved by the HFA.
- The employee should serve primarily the property at which they live. This is the one element that IRS has indicated that they would examine during an audit. The question that arises if an employee works at another property – or even has another job – is whether the presence of the employee unit is really necessary for project operations.
Owners should take special care when designating an employee unit at a mixed-income property. Some HFAs will not permit a change in employee units at mixed-income projects.
Generally, employee units must be occupied by an onsite manager, assistant manager, or maintenance personnel who work primarily at the property in which the unit is located. As noted in #3 above, it is critical that the employee work at the property on a full-time (or near full-time) basis. If it is intended that the employee also work at another project, HFA approval should be sought before designating the employee unit.