This issue snapshot addresses certain requirements for qualified residential rental projects financed by exempt facility bonds issued under IRC Section 142. It discusses the residential rental property requirements of IRC Section 142(d), including what types of property can be financed and the qualified uses of that property. It does not discuss income requirements for tenants of qualified residential rental projects, the rules governing the qualified project period, or other guidance applicable to qualified residential rental projects. IRC section and Treasury regulation IRC Section 142(d) Treasury Regulation 1.103-8(a)(2), (a)(3), and (b) Resources (court cases, Chief Counsel advice, revenue rulings, internal resources) Revenue Ruling 98-47 Private Letter Ruling 8221149 Private Letter Ruling 8308051 Private Letter Ruling 9711021 Private Letter Ruling 200345022 Analysis Residential rental project. A residential rental project is a building or structure, together with any functionally related and subordinate facilities, containing one or more similarly constructed units which 1) are used on other than a transient basis and 2) rented by or available to members of the general public on a continuous basis in accordance with the requirements of Treas. Regulation 1.103-8(b)(5)(1). These types of projects are often commonly referred to in the tax-exempt bond context as “multifamily housing,” although that particular term is not used in the applicable IRC section or regulations. The following are not residential rental projects: Hotels, motels, dormitories, fraternity and sorority houses, rooming houses, hospitals, nursing homes, sanitariums, rest homes, and trailer parks and courts for use on a transient basis. See Treas. Regulation 1.103-8(b)(4)(i). A residential rental project does not include any building or structure that contains fewer than five units, one of which is occupied by an owner of the units. See Treas. Regulation 1.103-8(b)(4)(iv). A residential rental project must satisfy the public use requirement under Treas. Regulation 1.103-8(a)(2). The units must be legally and practically available to members of the general public. Units are not considered available to the general public if they are provided only for members of a social organization or a particular employer’s employees. See Example 2 in Treas. Regulation 1.103-8(b)(9). Revenue Ruling 98-47 provides additional guidance regarding whether different buildings in a continuing care retirement community are considered residential rental property, based on the type and level of services provided in each. Building or structure. This generally refers to a discrete edifice or other man-made construction consisting of an independent foundation, outer walls, and a roof. A single unit which is not an entire building but is merely part of a building does not meet this definition of a building or structure. See Treas. Regulation 1.103-8(b)(8)(iv). Unit. A unit is an accommodation containing separate and complete facilities for living, sleeping, eating, cooking and sanitation. An example would be an apartment containing a living area, sleeping area, bathing and sanitation facilities, and cooking facilities equipped with a cooking range, refrigerator, and sink, all of which are separate and distinct from other apartments. See Treas. Regulation 1.103-8(b)(8)(i). Several private letter rulings discuss what constitutes a unit, depending on the specific configuration of the cooking or sanitation facilities, the characteristics of the intended occupants and the nature of common services provided. See PLRs 8221149, 8308051 and 9711021. A unit shall not fail to be treated as a residential unit merely because it is a single-room occupancy unit (within the meaning of IRC Section 42). See IRC 142(d)(2)(D). Corporate or conduit tenants. An analysis of certain arrangements relating to the leasing of units to corporate or conduit entities for re-leasing to residents can be found in PLR 200345022, which concludes that the specific arrangements do not cause the units to be occupied on a transient basis or to fail to be available for general public use. Multiple buildings. Separate buildings are considered as part of the same project if they meet certain criteria. Generally, they must 1) be proximate to one another, 2) have similarly constructed units, 3) be owned by the same person and 4) be financed pursuant to a common plan. See Treas. Regulation 1.103-8(b)(4)(ii). Functionally related and subordinate property. Under the exempt facility rules, a residential rental project includes certain functionally related and subordinate property. This includes facilities for use by tenants, such as swimming pools, recreational facilities and parking areas as well as other facilities reasonably required for the project (heating, cooling and trash disposal equipment, units for managers or maintenance personnel). See Treas. Regulations 1.103-8(a)(3) and 1.103(b)(4)(iii). Mixed use building. A residential rental project shall not be treated as non-qualified residential property merely because part of the building in which it is located is used for purposes other than residential rental purposes. See IRC Section 142(d)(1). Issue indicators or audit tips In the context of residential rental property, the term “unit” can be used to describe a wide variety of accommodations, ranging from conventional apartments to corporate housing to various types of senior community living facilities. A number of relevant PLRs are available and may be very helpful when making a determination of what qualifies as a unit, especially in cases where the definition provided in the regulations does not fully address the project under examination.
