SECTION 2. BACKGROUND

.01 Section 42 of the Internal Revenue Code provides rules for determining the amount of the low-income housing credit, which is allowed as a credit against income tax under section 38. A low-income unit is a residential unit that is rentrestricted and whose occupants meet the applicable income limit elected by the taxpayer as described in section 42(g)(1)(A) or (B).

.02 Under section 42(i)(3)(B)(i), a lowincome unit is not treated as a low-income unit unless it is suitable for occupancy and used other than on a transient basis. Under section 42(i)(3)(B)(ii), the suitability of a unit for occupancy must be determined under regulations prescribed by the Secretary taking into account local health, safety, and building codes. Failure of one or more units to qualify as low-income units may result in a low-income housing project’s ineligibility for the low-income housing credit, reduction in the amount of the credit, and/or recapture of previously allowed credits.

.03 Section 1.42–5 of the Income Tax Regulations provides procedures that an Agency (or its Authorized Delegate within the meaning of § 1.42–5(f)(1))

must follow in monitoring for compliance with the provisions of section 42.

.04 Section 1.42–5T(c)(2)(ii) requires an Agency to conduct on-site inspections and perform low-income certification review (including documentation supporting the low-income certifications and the rent records for tenants) for each lowincome housing project.

.05 Section 1.42–5T(c)(2)(iii) requires an Agency to conduct on-site inspections that satisfy the requirements of both § 1.42–5(d) and § 1.42–5T(c)(2)(iii)(A)–(D) (relating to timing, number of low-income units, manner of selection, and method of review) and to perform low-income certification review that satisfies the requirements of § 1.42–5T(c)(2)(iii)(A)–(D).

.06 Section 1.42–5T(c)(2)(iii)(A) requires an Agency to conduct on-site inspections of all buildings in a low-income housing project and review low-income certifications by the end of the second calendar year following the year the last building in the project is placed in service and at least once every 3 years thereafter.

.07 Section 1.42–5T(a)(2)(iii) provides that guidance published in the Internal Revenue Bulletin may provide alternative means of satisfying the requirements of §§ 1.42–5(a)(2)(i) and 1.42–5T and may provide exceptions from those provisions. Section 1.42–5T(c)(2)(iii)(B) provides that an Agency must conduct on-site inspections and low-income certification review of no fewer than the minimum number of low-income units required by guidance published in the Internal Revenue Bulletin.

.08 Section 1.42–5T(c)(2)(iii)(C) requires an Agency to select the low-income units for purposes of on-site inspections and low-income certification review in a random manner. The Agency must select the low-income units to inspect and lowincome certifications to review in a manner that will not give advance notice that a low-income unit or low-income certifications for a particular year will or will not be inspected or reviewed. However, the Agency may give an owner reasonable notice that an inspection of the building and low-income units or review of low-income certifications will occur so that the owner may notify ten

ants of the inspection or assemble lowincome certifications for review. Section 1.42–5T(c)(2)(iii)(C)( 3 ) provides rules for determining the meaning of “reasonable notice.”

.09 An Agency does not need to select the same low-income units for on-site inspections and low-income certification review. If the Agency chooses to select different low-income units for on-site inspections and low-income certification review, the Agency must select the units for on-site inspections or low-income certification review separately and in a random manner. An Agency may choose a different number of units for on-site inspections and low-income certification review, provided the Agency chooses at least the minimum number of low-income units in each case.

.10 Any pattern of overlap or nonoverlap of the units selected for inspection and the units selected for low-income certification review must not violate § 1.42–5T(c)(2)(iii)(C)( 2 ) (which limits advance notification to reasonable notice of which units will be subject to inspection or low-income certification review). Thus, if the Agency chooses to select the same units for on-site inspections and low-income certification review, the Agency may conduct on-site inspections and low-income certification review either at the same time or separately, but within the reasonable-notice period. This period starts to run on the date the Agency informs the owner of the identity of the units for which on-site inspections or lowincome certification review will occur.