What are ‘Reasonable Attempts?’ Vacant Unit Rule Requires LIHTC Property Managers to Emphasize Renting to Low-Income Tenants

Published by Nicolo R. Pinoli on Wednesday, June 29, 2022 - 12:00am

As low-income housing tax credit (LIHTC) properties continue to emerge from the worst of the COVID-19 pandemic, they are likely seeing more tenant movement than in the past few summers. The combination of the most tenant mobility since before the pandemic with the first summer without the related eviction moratoriums, means LIHTC property managers should keep in mind the specifics of the vacant unit rule.

This rule and myriad other considerations for LIHTC properties are included in the 2022 edition of the Novogradac Low-Income Housing Tax Credit Handbook, available now.

As most LIHTC property owners and managers are aware, vacant units generally fail to qualify as low-income units without tenants living in them. That standard applies to the period after a property is placed in service and before the first rental, as well as when a tenant moves out.


However, the vacant unit rule exists to help retain income-restricted percentages for properties when a unit becomes vacant. The rule is applied on a project basis, which means it can apply to a multibuilding LIHTC development that is considered one project.

Start with the fundamentals: To qualify for the vacant-unit rule, reasonable attempts must be made to rent a low-income unit–or the next available unit–to tenants who are qualified as low-income tenants before any other units in the project are rented to tenants at market rate. The rule’s purpose is to encourage property managers to focus on renting their low-income apartments first, then rent the market-rate apartments. The goal is to ensure the property retains its emphasis on low-income housing.

As with virtually everything in affordable housing (or any other area of governmental oversight), there are important details. For starters, under Treasury Regulation (Treas. Reg.) Section 1.42-15(a), the definition of “available low-income unit” is an apartment of comparable or smaller size. Also, an apartment stops being an available low-income apartment when it is no longer available due to a contractual arrangement such as a contract with a prospective tenant. In such a scenario, when a vacant unit that was occupied by a low-income tenant is leased to a tenant who does not meet the low-income standards, the apartment ceases to be a low-income unit.

To qualify under the vacant unit rule requires that the property manager makes reasonable attempts to rent that apartment–or the next available apartment–to qualified low-income tenants. Reasonable is the key word. If a property manager makes reasonable attempts, vacant market-rate units can still be rented before the vacant low-income units.

What is a “reasonable attempt to rent a vacant unit?”

Unfortunately, that may vary depending on where the property is located, the size of the LIHTC property and myriad other factors, including the different media and technologies accessible. The definition of “reasonable attempt” is based on facts, but in Revenue Ruling 2004-82, Q&A 9, the Internal Revenue Service (IRS) specifically declined to proffer any objective definition for the term reasonable. In fact, that guidance specifies, “what constitutes a reasonable attempt to rent a vacant unit is based on facts and circumstances and may differ from project to project.”

For property managers, the recommended practice is to check with the applicable state agency to determine how it interprets IRS rules and to provide context to efforts to rent the apartment.

One more consideration: While a vacant low-income unit generally retains its character as a low-income unit when a tenant transfers from an apartment in one building to an apartment in a different building in the same project, Treas. Reg. Section 1.42-15(d) states that the apartment that the tenant leaves takes on the qualification status of the unit into which the tenant moves. In other words, if both apartments are qualified low-income units, the apartment from which the tenant moves remains a low-income unit, but if the tenant moves from an income-qualified unit into a previously non-income-qualified unit, the former apartment is considered an unqualified unit after the transfer.

LIHTC property owners and managers should keep the vacant unit rule in mind anytime they face a vacancy or transfer. Failure to do so could lead to a reduction in the applicable fraction, which also could decrease the qualified basis, and in the extreme situation, potentially resulting in consequences as devastating as recapture of previously claimed credits.

Don’t Forget About This Essential LIHTC Resource

The 2022 edition of the Novogradac Low-Income Housing Tax Credit Handbook provides more details about all aspects of the LIHTC incentive, including new information and discussion of the LIHTC provisions of the American Rescue Plan Act of 2021, corporate LIHTC investors and the proportional amortization method and more. The handbook is an authoritative guide to Internal Revenue Code Section 42.