The next available unit rule requires the owner of a Low-Income Housing Tax Credit (LIHTC) property to rent the next comparable vacant unit in the same building to an income-qualified household whenever an existing tenant’s income rises above 140 percent of the applicable limit. Follow it, and the over-income unit keeps its low-income status for tax credit purposes. Miss it, and that unit loses its designation immediately, with credit recapture a real possibility. The rule lives in Section 42(g)(2)(D) of the Internal Revenue Code and Treasury Regulation 1.42-15.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit2eCFR. 26 CFR 1.42-15 – Available Unit Rule
When the Rule Is Triggered
For standard LIHTC projects using the 20-50 or 40-60 minimum set-aside test, a unit becomes “over-income” when the household’s combined earnings exceed 140 percent of the applicable income limitation.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit The applicable limit is drawn from the area median gross income (AMGI) figures HUD publishes each year for every metropolitan area and non-metropolitan county.3HUD USER. Income Limits
There is real headroom before the rule bites. A household that originally qualified at 60 percent of AMGI does not trigger anything until earnings pass 140 percent of that number, which works out to roughly 84 percent of AMGI. Below that line, the unit stays low-income and no action is required.
Two conditions have to hold for the over-income unit to keep its low-income designation once the tenant crosses the line:
- The tenant met the applicable income limit when they moved in.
- The unit continues to be rent-restricted at or below 30 percent of the applicable AMGI figure for its designated income level.
That second condition traps owners who assume an over-income tenant means an over-income rent. It does not. Rent on the unit stays capped at the LIHTC-restricted level for as long as the owner wants to count the unit as low-income. Raising rent above the cap kills the designation regardless of what happens with the next vacancy.2eCFR. 26 CFR 1.42-15 – Available Unit Rule
What the Owner Has to Do
Once a tenant is over-income, every comparable or smaller vacancy that opens in the same building has to go to an income-qualified household until the building’s set-aside is restored. Rent that vacancy to a market-rate tenant instead, and the over-income unit loses its low-income status immediately. If enough units flip, the building can fall below its minimum set-aside, and credits claimed in prior years can be recaptured.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit
The over-income unit itself keeps its low-income designation through this process. Only after a qualified household signs a lease on a comparable vacancy does the original over-income unit convert to market-rate. At that point, and not before, the owner can raise rent on it.
Most violations happen because a manager does not realize a pending vacancy is subject to the rule and leases it to the first applicant. Tracking which buildings currently have an over-income tenant, and which vacancies within those buildings count as comparable, prevents that.
What Counts as a Comparable Unit
A comparable unit is one the same size as or smaller than the over-income unit. Size has to be measured using the same method the owner used to compute the building’s qualified basis for the credit year in which the vacancy became available.2eCFR. 26 CFR 1.42-15 – Available Unit Rule
If a two-bedroom unit is over-income, the next available two-bedroom or one-bedroom vacancy must go to a qualified household. A three-bedroom vacancy does not satisfy the rule. And the measurement method has to stay consistent: an owner who used square footage to calculate qualified basis cannot switch to bedroom count to decide what is comparable.
The Rule Applies Building by Building
The rule operates at the building level, not the project level. The IRS tracks each structure by its Building Identification Number (BIN), assigned by the state housing credit agency and recorded on Form 8609.4Internal Revenue Service. Instructions for Form 8609 An over-income event in one building creates no obligation for another building on the same site, even when the buildings share a project.
For a multi-building complex, that means every lease, vacancy, and income change has to be tracked to the correct BIN. A separate Form 8609 is filed for each building, and compliance reporting follows the same structure.5Internal Revenue Service. About Form 8609, Low-Income Housing Credit Allocation and Certification
Multiple Over-Income Units at Once
When several tenants in the same building cross the 140 percent line in the same period, the owner does not need to pair each over-income unit with a specific replacement. Renting any comparable vacancy to a qualified household counts toward all of the over-income units at the same time.6Federal Register. Section 42, Low-Income Housing Credit Average Income Test Regulations The owner keeps filling comparable vacancies with income-qualified tenants until the building meets its required set-aside percentage again.
Income Averaging Projects
Projects that elected the average income test under Section 42(g)(1)(C) calculate the over-income threshold differently. A unit becomes over-income when the household earns more than 140 percent of the greater of two figures: 60 percent of AMGI, or the imputed income limitation designated for that specific unit.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit Because averaging allows different tiers (20 percent, 30 percent, 50 percent, and so on), the trigger point varies unit by unit.
The replacement tenant also has to fit a specific income limitation. If the vacant unit was previously a low-income unit, the new household’s income cannot exceed the imputed income limitation designated for that unit. If the vacancy was not previously a low-income unit, the owner has to designate an imputed income limitation for it, and that designation cannot push the project’s overall average above 60 percent of AMGI.6Federal Register. Section 42, Low-Income Housing Credit Average Income Test Regulations
Deep Rent Skewed Projects
Deep rent skewed projects described in Section 142(d)(4)(B), where at least 15 percent of low-income units are rented to households earning 40 percent or less of AMGI, get more favorable treatment in two ways.1Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit The over-income threshold rises from 140 percent to 170 percent of the applicable income limitation. And the comparable unit requirement loosens: instead of matching size, the owner must rent the next available low-income unit of any size to a qualified household whose income does not exceed 40 percent of AMGI.2eCFR. 26 CFR 1.42-15 – Available Unit Rule
Over-Income Tenants Cannot Transfer to Another Low-Income Unit
Treasury Regulation 1.42-15(c) prohibits moving an over-income household into a different low-income unit in the same building. Doing so would tie up a second low-income unit with a non-qualifying tenant. If an over-income tenant needs to relocate within the project, the only option is a market-rate unit. In 100 percent LIHTC buildings, that means over-income tenants effectively stay in place.
How Violations Are Found and What They Cost
Over-income events are surfaced through annual income recertification, which is how managers confirm whether existing tenants still qualify and whether any have crossed the 140 percent threshold. Mixed-income buildings must recertify every tenant each year. Buildings occupied entirely by low-income tenants can qualify for an exception created by the Housing and Economic Recovery Act of 2008, provided no new resident during the year earns more than the applicable limit.
When the state housing credit agency finds a violation, it reports the noncompliance to the IRS on Form 8823. The IRS notifies the owner that nonqualified units cannot be included when computing credits, and recapture is calculated on Form 8611: roughly one-third of the credits previously claimed (the accelerated portion) is multiplied by the percentage decrease in qualified basis.7Internal Revenue Service. Recapture of Low-Income Housing Credit Form 8611 If the building drops below its minimum set-aside altogether, 100 percent of the accelerated portion is recaptured. Interest runs at the IRS overpayment rate. The IRS also uses Form 8823 filings to decide whether a full audit of the owner’s return is warranted.
Records to Keep
Compliance records, including income certifications, lease files, and available unit documentation, must be retained for at least six years after the due date (with extensions) for filing the federal income tax return for that year. First-year credit period records have a longer requirement: at least six years beyond the due date for the return covering the last year of the compliance period.8eCFR. 26 CFR 1.42-5 – Monitoring Compliance With Low-Income Housing Credit For a 15-year compliance period, first-year records can end up stored for more than 20 years. State agencies sometimes require more. Detailed logs of every vacancy, lease start date, income verification, and available unit determination are what an owner will need if the state agency or IRS questions whether the rule was followed.