Virtually all affordable housing programs, including Section 8 and the Low-Income Housing Tax Credit (LIHTC), require that the lessees of the unit use apartments being rented under the applicable program as a “principal residence”. Agencies have not provided a lot of guidance regarding how to define a “principal residence.” A common definition of “principal residence” is the home that a person physically occupies and personally uses the most.
The tax code provides no specific definition. With regard to tax law, whether or not a taxpayer uses a property as his principal residence depends on all the facts and circumstances in each case, including the good faith of the taxpayer. Clearly, if someone lives in the same home for years and considers it to be their only home, it is clearly a principal residence. At the same time, taking a couple of weeks’ vacation from the home each year does not create a situation where the home is no longer a principal residence.
But what about longer absences? The IRS has provided the following example: “Professor Paul Beard, who is single, bought and moved into a house on August 28, 2001. He lived in it as his main home continuously until January 5, 2003, when he went abroad for a one-year sabbatical leave. During part of the period of leave, the house was unoccupied, and during the rest of the period, he rented it. On January 6, 2004, he sold the house at a gain. Because his leave was not a short, temporary absence, he cannot include the period of leave to meet the two-year use test.”
The IRS does concede that ownership and use requirements do not have to be continuous, but clearly, they intend that it be the main place of residence.
A court case in Massachusetts has provided some additional guidance on what constitutes a “principal residence.” In Boston Redevelopment Authority v. Pham (2015), the Massachusetts Court of Appeals affirmed a Superior Court decision that the owner of an affordable housing condominium unit did not violate the deed, affordable housing covenant, and other documents’ restrictions on the use of the unit as the owner’s principal residence by using the unit as the home base for extensive business travel and by taking roommates to share housing costs.
While this case involved a condo purchase and not a rental apartment, the definitional issues considered by the court are instructional for rental housing.
The condominium covenant required Pham to occupy the unit as his principal residence. The determination of whether he occupied the unit as his principal residence is a mixed question of law and fact.
As the phrase “occupy as principal residence” was not defined in the covenant or other documents (and it is not usually defined in rental leases), the trial court reasonably considered factors such as: (1) Pham neither leased nor owned property elsewhere; (2) he used the unit as his home base despite his extensive work-related travel;
(3) Pham kept a room in the unit and was physically present there for one to two weeks per month; (4) he maintained his valuable personal possessions there; (5) he identified the unit as his tax address and address for other official purposes; and (6) he kept the utilities in his name and paid those bills.
Leases generally do not prevent residents of affordable housing from taking jobs demanding frequent travel, assuming they maintain the affordable housing unit as their home. Such restrictions would conflict with the goals of aiding persons of moderate and middle income.
The court found that Pham was an owner/occupier of the unit for residential purposes, and had not leased the entire unit for business, speculative, or investment purposes.
When determining whether an affordable unit is the principal residence, the issues noted above should be considered. Basically, it will boil down to a “facts and circumstance” test, but if it is clear that the apartment is the primary home of the resident – even if they are gone for extended periods of time – it should be considered the principal residence.
A question that comes up often regarding tax credit compliance is whether a low-income tenant can have more than one residence and still be considered a qualified low-income resident for LIHTC purposes.
The short answer is “yes,” but as tax credit professionals, we are expected to know not only the answer to a question, but the reason for the answer.
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.
Section 42 is not clear on the issue. Section 42(i)(3) defines a “low-income unit” as any unit in a building if
- The unit is rent-restricted; and
- The individuals occupying the unit are income eligible.
This section of the Code goes on to state that a unit is not considered low-income unless it is suitable for occupancy and used on other than a transient basis (except for SRO units or transitional housing for the homeless). This statement regarding “transient” housing is as close as Section 42 comes to dealing with whether a tax credit unit must be the sole residence in order to be considered low-income.
The term “residential rental property” generally has the same meaning for the LIHTC program as for housing financed by tax-exempt bonds. For specific guidance on this, one should refer to 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 is 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 indicates 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.