C. Out of Compliance — IRS Publication 5913 — Low-Income Housing Credit: Guide for Completing Form 8823 (Jan. 2024)

(1) federal subsidy is used (directly or indirectly) for the building or for its operation and:
- The taxpayer fails to elect (on Part II, Form 8609) to reduce the Eligible Basis of the building,
- The taxpayer elects (on Part II, Form 8609) to reduce the Eligible Basis of the building but the reduction is not properly reflected in the Eligible Basis of the building determined at the close of the first year of the credit period, or
- The federal subsidy is not redeemed or paid before the building is placed in service and the taxpayer did not elect to reduce the Eligible Basis as described above.
(2) A new building receiving the 70 percent present value credit is also out of compliance if it otherwise meets the “In Compliance” requirements above, but a federal subsidy is subsequently used with respect to the building or its operation during years 2 through 15 of the compliance period.
(3) A building placed in service before July 31, 2008, receiving assistance under the HOME or NAHASDA programs and subject to the 40-50 rule, is out of compliance if the number of residential units in the building occupied by individuals whose income is 50 percent or less of area median gross income is less than 40 percent.
(4) A building is out of compliance as of the date the federal subsidy rule (or exception) is violated.
(5) Example 1: Assistance under HOME
- An owner received an allocation of 70 percent credit for a building constructed using HOME assistance and placed in service on January 1, 2007. The state identified, on line 6f of Form 8609, that the building was not federally subsidized by reason of the 40-50 rule under IRC §42(i)(2)(E).
- The owner complied with the 40-50 rule, and therefore was able to claim the 70 percent credit, for tax years 2004, 2005 and 2006. In 2007,

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however, the number of units rented to households with income of 50% or less than AMGI fell below the minimum required 40%.

The taxpayer is out of compliance. Therefore, the Applicable Percentage for the year of noncompliance and all subsequent years is limited to the 30% present value credit.