LIHTC Next Available Unit Rule: 140% Threshold and Compliance

When a household in a Low-Income Housing Tax Credit unit sees its income rise above 140% of the applicable limit, the LIHTC Next Available Unit Rule requires the owner to lease every comparable or smaller vacancy in that same building to a qualifying low-income household until the building returns to its required low-income occupancy level. The over-income unit keeps counting as a low-income unit and continues to generate credits, provided the owner follows the rule and keeps the unit rent-restricted.¹

What Triggers the Rule

Owners who elected the 20-50 or 40-60 minimum set-aside must recertify each household’s income annually and compare it to the current area median gross income for that location.² A household that qualified at move-in remains low-income even if earnings rise over time. The threshold that changes the owner’s obligations is 140% of the income limitation applicable under the project’s elected test.¹

For a 40-60 project, the comparison is 140% of 60% of area median gross income. For a 20-50 project, it is 140% of 50%. Once a recertification shows the household has crossed that line, the Next Available Unit Rule activates immediately. Whether the household is over by $100 or $10,000 does not matter; the compliance obligation is the same.

What the Rule Requires

Once a household is over-income, the owner must rent every comparable or smaller unit that becomes available in the same building to a tenant who meets the building’s income restriction. “Available” means the unit is vacant and ready for occupancy. The obligation continues until the building returns to its required low-income occupancy percentage.¹

A common misreading is that only “the next” vacancy needs to go to a qualified tenant. The actual rule is broader. The over-income unit loses its low-income status if any comparable or smaller unit in the building is leased to a new resident whose income exceeds the applicable limit. Skipping a vacancy and filling a later one with a qualified household does not satisfy the rule. Every comparable vacancy counts.

The rule applies building by building, not across an entire development. A property with five separate buildings only needs to apply the rule in the building where the over-income household lives. Vacancies in other buildings are irrelevant to that building’s compliance.³

What Counts as a Comparable Unit

Under the Treasury regulation, a comparable unit is any residential unit in the same low-income building that is the same size as, or smaller than, the over-income unit. The size measurement must match the method the project uses to determine qualified basis, typically square footage or bedroom count.³ If a two-bedroom unit is occupied by an over-income household, all vacant one-bedrooms and two-bedrooms in that building are subject to the rule; three-bedrooms are not.

Units set aside for on-site staff such as resident managers or maintenance employees are generally classified as common area rather than residential rental units. Because they are not offered to the general public, they typically fall outside the available unit calculation unless the property converts them to residential use.

Multiple Over-Income Units in One Building

When more than one household in a building crosses the 140% threshold, the order in which available units are filled does not matter for compliance. What matters is that every comparable vacancy goes to a qualified household. If the owner leases even one comparable unit to a non-qualifying tenant, all over-income units of comparable size or larger in that building lose their low-income status at once.³ A building with three over-income two-bedrooms can lose all three because of a single leasing mistake on one vacant two-bedroom.

Rent and Tenant Protections While Over-Income

The over-income unit must remain rent-restricted. Under the statute, gross rent cannot exceed 30% of the imputed income limitation applicable to that unit, based on bedroom count and the project’s elected income limit.¹ Rent can move up to the current LIHTC maximum as income limits are updated annually, but charging market rent while claiming the unit for credits violates federal law.

The tenant cannot be forced to leave. Nothing in the LIHTC statute permits eviction based on increased income. The framework assumes the over-income household stays in place while the owner addresses compliance through future vacancies, and the extended use agreement generally prohibits eviction except for good cause.¹

As long as the household qualified at move-in and the unit stays rent-restricted, the unit continues to count as low-income for purposes of the building’s applicable fraction and continues to generate credits.¹ If the owner violates the Next Available Unit Rule, that protection disappears and the unit’s low-income status is revoked retroactively for the year of noncompliance.

Consequences of a Violation

If an owner rents a comparable or smaller vacant unit to a non-qualifying tenant, the over-income unit immediately loses its low-income status. Where multiple over-income units exist in the building, all over-income units of comparable size or larger lose their status simultaneously.³ Dropping those units from the low-income count can put the building below its minimum set-aside, meaning the owner cannot claim credits on the affected units and may face recapture of credits already taken.

Credit recapture is calculated under IRC §42(j) and accelerates the tax due on previously claimed credits plus interest. For a building with several over-income units, one improper lease can generate a six- or seven-figure tax liability.

How Violations Get Reported

Owners do not report violations directly to the IRS. The state housing finance agency that allocated the credits monitors compliance and files IRS Form 8823 when it identifies a problem. Line 11i of Form 8823 covers violations of the Available Unit Rule.⁴ The IRS then decides whether to adjust the owner’s credits.

Most monitoring agencies allow a correction period after discovering a violation, typically 30 to 90 days. If the owner identifies the problem, corrects it, and reports it before the agency’s annual reporting cycle, some agencies will not file Form 8823 for that issue. Catching an over-income household early and holding comparable vacancies for qualified tenants is far better than being surprised during an audit.

Income Averaging Projects

Projects that elected the average income test under IRC §42(g)(1)(C) follow a modified version of the rule. A unit becomes over-income when the household’s income exceeds 140% of the greater of 60% of area median gross income or the imputed income limitation designated for that specific unit.³ In most cases the 60% AMGI floor controls, so a unit designated at 30% AMI still uses 140% of 60% AMGI as its trigger, not 140% of 30% AMI.

Filling requirements differ as well. When a previously designated LIHTC unit becomes vacant, the new tenant’s income must fall within that unit’s designated imputed income limitation. For a unit that was not previously designated, the new tenant’s income must meet whatever limit keeps the project’s overall average at or below 60% AMGI.³

Deep Rent Skewed Projects

Properties operating under the deep rent skewing election in IRC §142(d)(4)(B) use a higher over-income trigger: 170% of the applicable income limit instead of 140%.⁵

Two tradeoffs come with it. First, the definition of “comparable unit” expands. In a standard LIHTC project, only units the same size or smaller than the over-income unit are comparable. In a deep rent skewed project, any low-income unit in the building qualifies as comparable, regardless of size.³ Second, gross rent on every low-income unit in the project cannot exceed half the average gross rent for comparable-sized market-rate units in the building.⁵ Confirm whether the property actually made this election before applying either set of rules.

100% Affordable Properties

Properties where every unit is restricted under the LIHTC program operate under a different regime. Annual income recertification is not required, because no residential unit can lawfully be occupied by a new resident whose income exceeds the applicable limit. Every vacancy must go to a qualifying household by definition, so the Next Available Unit Rule is built into everyday leasing.¹ A household that qualified at move-in continues to be treated as income-qualified by the IRS for the duration of the tenancy, as long as rents stay restricted and every new vacancy goes to an eligible tenant.

The exemption saves administrative cost but does not eliminate all obligations. Owners still verify income for every move-in and maintain rent restrictions on every unit. Some state housing finance agencies require additional documentation even where federal law waives annual recertifications, so confirm your monitoring agency’s specific requirements.

Transfers Within the Building

An over-income household can transfer to a different unit within the same building, but the over-income designation follows the household rather than the physical unit. After the transfer, the new unit carries the over-income status, and the vacated unit takes on whatever status the household’s new unit previously held. Because the rule is a building-level rule, transferring to a different building within the same project is not permitted; the over-income status would leave the building where it was triggered and create tracking problems for both buildings.

Update compliance records immediately when an intra-building transfer occurs to reflect which unit is now designated over-income. The vacated unit is not automatically treated as an “available unit” under the rule; its status depends on what it was before the swap.

1
Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit
2
HUD Exchange. HOME Income Limits
3
eCFR. 26 CFR 1.42-15 – Available Unit Rule
4
IRS. Form 8823
5
Office of the Law Revision Counsel. 26 USC 142 – Exempt Facility Bond