Claiming Low-Income Housing Tax Credit on Temporary Transfer Unit

A question that clients often ask regarding moving tenants around on acquisition rehab projects is “Can we claim the credit on both units, even though the resident will only be in the temporary unit until the rehab is done on their apartment”. Unfortunately, I cannot give an answer that is fully supported by any regulatory reference. Generally, transient units are not credit eligible, and clearly, the second unit is being used on a temporary (transient) basis. However, the resident is on a lease (so the resident is not transient) and they are being provided with rent-restricted housing on a continuous basis. The owner should be able to obtain a tax credit due to the benefits being provided to the resident. It does not appear to be a fair result if the owner loses credit on both units while still providing affordable housing to the resident.  While units swap status in a transfer, this is not a “transfer,” so I don’t believe we can rely on the unit transfer rule to preserve the credits.

So, what are your options? (1) Treat the temporary unit as transient and don’t claim the credit on either unit. This is the safest course. (2) Claim credit on the temporary unit for the months the household is in that unit and leave the permanent unit out of the applicable fraction. While this is the more aggressive of the two options, it is the one I would choose if I was the owner.

Ultimately, it is a fairness issue (but the tax code is not always fair). The only way to truly know if this would meet with IRS approval would be to request a Private Letter Ruling (PLR). While this is costly, it may be the only way to resolve the question. It must be noted that a Private Letter Ruling is not precedent and may only technically be applied to the specific case for which it is requested.  Having said that, PLRs often provide good indicators of IRS thinking on a specific issue.

My recommendation in these cases is to claim the credit on both units (but not at the same time).  If challenged, I would make the argument that this is not a transient unit since the resident has a lease at the property and is being housed at restricted rents. Since the resident is still under lease at the property, and they are being housed on a non-transient basis, the particular unit they are in should not impact the ability of the owner to claim full tax benefits.

I realize this is a pretty aggressive position to take and since I cannot offer legal or accounting advice, owners should consult with their own counsel before deciding on a course of action.