A short time ago I posted an article providing an overview of the new IRS final regulation on the Average Income Set-Aside. I promised to post a series of articles detailing some of the more complex elements of the final regulation and this is the first in that series. In this article, I will review the term “qualified group of units” and how it relates to establishing a building’s applicable fraction.

**Qualified Group of Units**

This new term means just what it sounds like; this is a group of units that – as a group – qualifies for tax credits and has an average imputed income limit of no more than 60%. A qualified group of units must be determined for two reasons:

1. To establish that at least 40% of the units in the project are qualified low-income units with an average imputed income of no more than 60%; and

2. to establish the units that may be included as a “group” for purposes of establishing the applicable fraction for the buildings.

**Determining “Qualified Groups of Units” for Purposes of the Applicable Fraction**

The applicable fraction is the percentage of a building occupied by qualified low-income households. It is the lesser of the percentage of low-income units or the percentage of low-income residential floor space and is determined on a building-by-building basis. Except for the first year of the credit period (where the applicable fraction is the average of the applicable fraction for each of the 12 months in the first year of the credit period), it is determined as of the last day of the tax year.

Under the final regulations, the determination of a group of units to be taken into account in the applicable fractions for the buildings in a project follows the same approach as determining a group of units to be taken into account for purposes of the set-aside test.

- Essentially, a taxpayer can determine this group of units by including the low-income units identified for the average income test, and any other residential units that can qualify as low-income units if they are part of a group of units such that the average of the imputed income limitations of all of the units in the group does not exceed 60 percent of AMGI.
- If the average exceeds 60 percent of AMGI, then the group is not a qualified group.

For example, if a unit was designated at 80 percent of AMGI and if including that unit in an otherwise qualified group of units causes the average of the imputed income limitations of the group to exceed 60 percent of AMGI, then the taxpayer cannot include the 80 percent unit in the otherwise qualified group. Only the otherwise qualified group of units, without the 80 percent unit, is a qualified group of units used to determine the project’s buildings’ applicable fractions.

Once a qualified group of units in a project has been identified for a taxable year, the applicable fraction for each building in the project is computed using the units that are in both the qualified group and the building at issue.

- (Although the qualified group of units for a project must have an average limitation no greater than 60 percent of AMGI, this is not true of the average limitation of the units used to compute the applicable fraction of individual buildings in the project.)
*This is critical and confirms that while a “project” must meet the 60% average, individual buildings are not required to do so.*

The following example illustrates how the qualified group of units concept is used in determining an individual building’s applicable fraction:

- A multiple-building housing project consisting of two buildings received an allocation of housing credit dollar amount, and the taxpayer who owns the project elects the average income test.
- The taxpayer intends for the buildings (each containing 5 units) to have 100 percent low-income occupancy.

- The taxpayer properly and timely designates the imputed income limitations for the 10 units in Buildings 1 and 2 as follows:
- Building A contains 2 units at 80 percent of AMGI and 3 units at 40 percent of AMGI; and Building B contains 2 units at 40 percent of AMGI and 3 units at 80 percent of AMGI, as illustrated here:

- Building A
- Unit A1: 80%

- Unit A2: 80%

- Unit A3: 40%

- Unit A4: 40%

- Unit A5: 40%

- Building B
- Unit B1: 40%

- Unit B2: 40%

- Unit B3: 80%

- Unit B4: 80%

- Unit B5: 80%

*Notice that while the average imputed income of the “project” is 60%, the average in building B is 64%.**This makes it clear that while a*__project__must maintain the 60% average, this is not the case for individual buildings in a project.

- In the first taxable year of the credit period (Year 1), the project is fully leased and occupied.
- Also, for the first credit year, the taxpayer follows the proper procedure in identifying all 10 units as a qualified group of units for the minimum set-aside and the applicable fraction determination.
- Line 8b of the 8609 and the Line 8b attachment indicate that these two buildings (BINs) are part of the same project.

**Analysis**

- For Year one, the identified group is a qualified group of units, and all ten units are included in the applicable fraction for the respective buildings.
- To determine the qualified basis, all 10 units in the identified qualified group of units across Building A and Building B are used in the applicable fraction determination when calculating the qualified basis of each building for purposes of determining the annual credit amount under section 42(a).
- The fact that the average of the units in Building B exceeds 60 percent of AMGI does not impact the applicable fraction of Building B because the average of the identified group of units across both buildings does not exceed 60 percent of AMGI.

**How Noncompliance Impacts the Applicable Fraction**

Assume that in Year five, the HFA performs a monitoring review of the project and finds that Unit A3 was occupied by an ineligible resident at move-in, *and the unit was ineligible at the end of the tax year. * Unit A3 is removed from the count of low-income units, leaving the remaining nine units with an average imputed income of 62.22%. In order to achieve the required 60% average, the owner must designate a group of units with a 60% or less average. The owner chooses to remove A2 from the applicable fraction for the year, leaving eight low-income units in the group with an average of 60%.

**Result**

Building A’s applicable fraction for Year five is 60% (three units out of five). Building B’s applicable fraction for Year 5 is 100%.

**Summary**

As always, the applicable fraction is determined on a building-by-building (BIN-by-BIN) basis during each year of the compliance period. However, the “qualified group of units” is always determined on a project basis. Once a qualified group of units in a project has been identified for a taxable year, the applicable fraction for each building in the project is computed using the units that are in both the qualified group and the building for which the applicable fraction is being determined.