LIHTC next available unit rule and over-income tenants

Income limits apply at move-in. After that, a household’s income can rise without disqualifying the unit, up to a point. This guide covers that point and what the owner must do once a household passes it.

The basic rule: units stay qualified

IRC 42(g)(2)(D)(i) says a unit occupied by a household that qualified when it moved in keeps counting as a low-income unit even if the household’s income later exceeds the limit, as long as the unit stays rent-restricted. That protects tenants from losing their homes when they get a raise, and protects owners from losing credit for it.

When the next available unit rule kicks in

Set-aside	Threshold	What triggers loss of status	Code
20-50 or 40-60	Household income rises above 140% of the applicable income limit	Any residential unit in the building of comparable or smaller size is rented to a new resident whose income exceeds the limit	42(g)(2)(D)(ii)
Average income	Income rises above 140% of the greater of 60% of AMI or the unit’s designated limit	Any comparable or smaller unit in the building is rented to a new resident whose income exceeds the limit described in 42(g)(2)(D)(v)	42(g)(2)(D)(iii)
Deep rent skewed (either)	170% instead of 140%	A low-income unit in the building is rented to a new resident above 40% of AMI (or the lesser of 40% or the unit’s designation under averaging)	42(g)(2)(D)(iv)

Under averaging, the “limit described” for the newly rented unit is the unit’s own designation if it was a low-income unit before it became vacant, or whatever designation that unit would need to keep the project’s average at or below 60%, for any other unit.

Worked examples

40-60 project. A 2-person household moved in at $48,000 when the 60% limit was $52,000. Three years later its income is $78,000 and the 60% limit for 2 people is $56,000. 140% of $56,000 is $78,400, so the household is still below the threshold and nothing changes. The next year income reaches $82,000 while the limit is $57,000; 140% is $79,800, and the household is now over-income.

From then on, every vacant unit of comparable or smaller size in the same building must be rented to a qualified household. If the owner rents one to a market-rate tenant, the over-income unit stops counting as low-income.

Income averaging project. A unit designated at 50% AMI has an over-income test at 140% of the greater of 60% or 50%, so 140% of the 60% limit. A unit designated at 80% tests at 140% of the 80% limit. The higher threshold for higher designations is deliberate: an 80% unit’s household can earn up to 112% of AMI before triggering the rule.

All dollar figures here are illustrative; look up actual limits by county on the income limits pages.

What counts as comparable or smaller

The statute uses “of a size comparable to, or smaller than.” Treasury’s regulation on the available unit rule, 26 CFR 1.42-15, treats comparability by size and number of bedrooms. Practical rule: a vacancy in any unit with the same or fewer bedrooms in that building should go to a qualified household while any over-income unit exists.

The rule is applied building by building. A vacancy in a different building of a multi-building project doesn’t trigger it, though owners should check how their agency reads its own monitoring rules.

Mixed-income buildings are where it matters

In a 100% low-income building, every vacancy is rented to a qualified household anyway, so the rule rarely has practical effect. In a mixed-income building, it controls leasing:

1. Track every household’s income at recertification against 140% (or 170%) of its applicable limit.
2. Flag the building when any household crosses it.
3. Route the next comparable or smaller vacancy to a qualified applicant, even if a market-rate applicant is waiting.
4. Once the over-income household moves out, or the number of qualified units has been restored, the restriction lifts.

The income averaging tool tracks each unit’s 140% threshold by designation.

Two common misreadings

“The over-income unit has to be re-rented at market.” No. The over-income household stays, at the restricted rent. What the rule controls is the next comparable or smaller vacancy elsewhere in the building.

“The rule applies across the whole project.” The statute is written per building: “any residential rental unit in the building.” A multi-building project tracks each building separately.

A short leasing checklist for mixed-income buildings

1. At each recertification, compare household income with 140% (or 170%) of the household’s current applicable limit, using the current year’s HUD limits.
2. Keep a per-building list of over-income units and their unit sizes.
3. When any unit of the same or fewer bedrooms becomes vacant in that building, hold it for an income-qualified applicant.
4. Document the marketing and the applicant pool for that vacancy, which also supports the vacant unit rule certification.
5. Remove the hold when the over-income unit becomes vacant or the building has re-established the required number of qualified units.

The vacant unit rule

Separately, 26 CFR 1.42-5(c)(1)(ix) requires owners to certify that when a low-income unit became vacant, reasonable attempts were made to rent that unit, or the next available unit of comparable or smaller size, to tenants having a qualifying income before any units in the project were rented to tenants not having a qualifying income. Agencies report violations on Form 8823 line 11j; available unit rule violations go on line 11i (Form 8823).

Recertification and the waiver

To know whether anyone is over 140%, the owner has to know current incomes, which means annual recertification. The IRS can waive annual recertification for a building occupied entirely by low-income tenants (42(g)(8)(B)); many agencies still require some form of annual certification, and student status still has to be checked. See the student rule.

For tenants

If your income has gone up since you moved in, you can generally stay. Your rent stays at the LIHTC rent for your unit, and your landlord can’t evict you without good cause because your income rose. What changes is how the landlord fills other vacancies. If you’re applying now, check the current limit with the eligibility tool.