SECTION 4. SAFE HARBORS

.01 Existing buildings under § 42(i)(5) and new buildings under § 42(e)(1). A residential unit in an existing building under § 42(i)(5) or a new building under § 42(e)(1) will be considered a low-income unit under § 42(i)(3)(A) at the beginning of the first taxable year of the building’s credit period under § 42(f)(1) if:

(1) The individuals occupying the unit have incomes that are at or below the applicable income limitation under § 42(g)(1) or § 142(d)(4)(B)(i) on either the date the existing building was acquired by the taxpayer or the date the individuals started occupying the unit, whichever is later (based on the area median gross income on that date), but their incomes exceed the applicable income limitation at the beginning of the first taxable year of the building’s credit period (based on the area median gross income on that date);

(2) The incomes of the individuals occupying the unit are first tested for purposes of the available unit rule under § 42(g)(2)(D)(ii) and § 1.42–15 at the beginning of the first taxable year of the building’s credit period;

(3) The unit has been rent-restricted under § 42(g)(2) from either the date the existing building was acquired by the taxpayer or the date the individuals started occupying the unit, whichever is later, to the beginning of the first taxable year of the building’s credit period;

(4) Either: (a) Section 42(h)(1) applies to the building and the taxpayer either receives an allocation to rehabilitate the existing building or enters into a binding commitment for an allocation to rehabilitate the existing building by either the end of the taxable year the taxpayer acquired the existing building or the end of the taxable year the individuals started occupying the unit, whichever is later; or

(b) Section 42(h)(1) does not apply to the building by reason of § 42(h)(4) and the tax-exempt bonds for the project are issued by either the end of the taxable year the taxpayer acquired the existing building or the end of the taxable year the individuals

during the building’s compliance period (which is defined in § 42(i)(1) as the period of 15 taxable years beginning with the first taxable year of the credit period under § 42(f)(1)).

.04 Section 42(i)(4) defines a new building as a building the original use of which begins with the taxpayer. An existing building is defined in § 42(i)(5) as any building which is not a new building. Section 42(e)(1) provides that rehabilitation expenditures paid or incurred by the taxpayer with respect to any building are treated as a separate new building for purposes of § 42.

.05 Section 42(f)(1) defines the credit period as the period of 10 taxable years beginning with (A) the taxable year in which the building is placed in service, or (B) at the election of the taxpayer, the succeeding taxable year, but in each case only if the building is a qualified low-income building as of the close of the first year of the period. Under § 42(f)(5)(A), the credit period for an existing building must not begin before the first taxable year of the credit period for rehabilitation expenditures with respect to the building.

.06 Section 42(g)(1) defines a qualified low-income housing project as any project for residential rental use that meets one of the following requirements: (A) 20 percent or more of the residential units in the project are both rent-restricted and occupied by individuals whose income is 50 percent or less of the area median gross income, or (B) 40 percent or more of the residential units in the project are both rent-restricted and occupied by individuals whose income is 60 percent or less of the area median gross income. Under § 42(g)(2), a residential unit is rent-restricted for purposes of § 42(g)(1) if the gross rent for the unit does not exceed 30 percent of the imputed income limitation for the unit. Residential units that satisfy these rent and income requirements are defined in § 42(i)(3)(A) as “low-income units.” Section 42(i)(3)(B), (C), (D), and (E) provide more requirements for low-income units. Under § 42(g)(4), a deep rent skewed project, as defined in § 142(d)(4)(B), is also a qualified low-income housing project. To be a deep rent skewed project, § 142(d)(4)(B)(i) requires that 15 percent or more of the low-income units in the project must be occupied by

individuals whose income is 40 percent or less of the area median gross income.

.07 Section 42(g)(2)(D)(i) provides that, notwithstanding an increase in the income of the occupants of a low-income unit above the income limitation applicable under § 42(g)(1), the unit will continue to be treated as a low-income unit if the income of the occupants initially met the income limitation and the unit continues to be rent-restricted. However, under the available unit rule in § 42(g)(2)(D)(ii), if the income of the occupants of the unit increases above 140 percent of the income limitation applicable under § 42(g)(1), § 42(g)(2)(D)(i) ceases to apply to the unit if any residential rental unit in the building (of a size comparable to, or smaller than, such unit) is occupied by a new resident whose income exceeds the applicable income limitation. In the case of a deep rent skewed project described in § 142(d)(4)(B), if the income of the occupants of the unit increases above 170 percent of the income limitation applicable under § 42(g)(1), § 42(g)(2)(D)(i) ceases to apply to the unit if any low-income unit in the building is occupied by a new resident whose income exceeds 40 percent of area median gross income. See also § 1.42–15 of the Income Tax Regulations.

.08 Under § 42(h)(1), the amount of the credit determined under § 42(a) for any taxable year with respect to any building must not exceed the housing credit dollar amount allocated to the building. However, under § 42(h)(4)(A), a credit allocation generally is not necessary for the portion of a building’s eligible basis financed by an obligation the interest on which is exempt from tax under § 103 and the obligation is taken into account under § 146. Under § 42(h)(4)(B), no credit allocation under § 42(h)(1) is necessary for any portion of a building’s eligible basis if 50 percent or more of the aggregate basis of the building and the land on which it is located is financed with tax-exempt obligations.