Excluding Garages from Eligible Basis Calculations, Gross Rent

Facts: The “eligible basis” of a project is the cost of acquiring an existing building if there is one (but not the cost of the land), plus construction and other construction-related costs to complete the project. This number is then multiplied by the percentage of the units that are “low income” to determine the project's “qualified basis” that actually qualifies for the credit.

An owner asked the IRS to make a ruling regarding the treatment of garage space at the site. Each unit has a garage, and a resident will lease a unit pursuant to a lease agreement that specifically excludes the garage. A resident wishing to lease a unit's garage needs to sign a separate agreement. A resident isn't required to lease a garage to lease a unit. And the owner won't allow a resident access to or use of the garage associated with his unit if he chooses not to lease the garage. Alternative parking is available for all residents at the site.

Also, if a resident doesn't lease a garage associated with his unit, then the owner may rent the garage to another lessee for storage purposes. The owner will provide access to the lessee through the main garage door and permanently close off any other point of access. The owner will separately meter the electricity attributable to the garage, and the resident won't pay this associated cost, unless he also leases the garage.

The owner asked the IRS for a ruling that the garages are not includable in the eligible basis and that the optional fee for access to and use of a garage is not includable in the computation for allowable rent.

Ruling: The IRS ruled that the eligible basis is determined without including the adjusted basis of the garages and, based on the facts, the fee for access to the garages is excluded from the gross rent calculations.

Reasoning: Based on the specific facts of this case, the IRS stated that the garages are neither residential rental property for purposes of Section 41 of the Internal Revenue Code (IRC) nor are they considered as common areas or comparable amenities provided to all residential units in any of the project buildings. IRC Section 42(d)(4) excludes the adjusted basis of any property that is not residential rental property from eligible basis under Section 42(d)(1).

As for gross rent calculations, Section 1.42-11(a) provides that any charges to low-income tenants for services that are not optional generally must be included in gross rent. Based on the facts, the garage fees are optional and not required as a condition of occupancy. Therefore, the fees are not included in the allowable rent computations.

• PLR 112865-11, No. 201149011 (12/9/11)