Waiving the Vacant Unit Rule During Renovation

Facts: When a low-income housing tax credit project owner violates the Vacant Unit Rule, all vacant units previously occupied by qualified households lose their low-income status and stop generating tax credits for the owner. A developer of a multi-building site asked the IRS if the Vacant Unit Rule could be waived under certain circumstances related to a necessary renovation.

The developer had elected for the site to be treated as a deep-rent-skewed project, which means that at least 15 percent of the low-income units would be initially occupied by households with gross incomes that did not exceed 40 percent of the area median gross income. During the second year after the completion of the project, the developer discovered extensive damage to the buildings. But because of safety issues and due to engineering reasons, the units had to be vacated during the renovations. All the residents were notified of the damage, told why they had to vacate the units, and were given an estimated time period by which the repairs would be completed and they could return.

To enable residents to reoccupy their low-income units after the renovation was completed, the developer entered into replacement leases with them, and said it would not rent a low-income unit to any other resident unless it had been vacant prior to the renovation or the resident decided not to return to the unit. In addition, the developer agreed to compensate the residents for their estimated cost of temporary housing.

Ruling: The IRS ruled that the developer's low-income units were continuously rented or available for rent, and continuously occupied, during the renovation.

Reasoning: The IRS found that the developer was taking the proper steps to correct the damage to the project within a reasonable period and therefore found the low-income units to be rented or available for rental on a continuous basis. The IRS also reasoned that upon completion of the renovation work, any low-income resident who reoccupies a unit in the project can be treated as a continuing resident of the project for the purposes of the higher income limitation rules of Sections 142(d)(3) and (4) of the Code.

• PLR 142013-08, No. 200923008 (6/5/09)