Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has clarified that utility costs paid by a tenant based on actual consumption in a sub-metered rent-restricted unit are treated as paid directly by the tenant for purposes of Code Sec. 42(g)(2)((ii). In order to qualify as a rent-restricted unit the gross rent for a unit in a low-income housing project may not exceed 30 percent of the imputed income limitation applicable to the unit. When utility costs are paid directly by the tenant, a utility allowance is added to the gross rent for that unit. Reg. §1.42-10, which was amended by
T.D. 9420 (TAXDAY, 2008/07/28, I.3), sets forth the circumstances under which gross rent includes a utility allowance and provides rules for determining the applicable utility allowance. Under the regulation, if the cost of any utility other than telephone, cable television or internet is paid directly by the tenant, and not by the owner of the building, the gross rent for the unit includes a utility allowance.

  The guidance provides that for purposes of Reg. §1.42-10(a), utility costs paid by a tenant based on actual consumption in a sub-metered rent-restricted unit are treated as paid directly by the tenant, and not by or through the owner of the building. For Rural Housing Service (RHS) assisted buildings, buildings with RHS tenant assistance, Department of Housing and Urban Development (HUD) regulated buildings, and rent-restricted buildings in other buildings occupied by tenants receiving HUD rental assistance, the applicable RHS or HUD rules apply. For all other tenants in rent-restricted units in other buildings under Reg. §1.42-10(b)(4)(ii):

  (1) the utility rates charged to tenants in each sub-metered rent-restricted unit must be limited to the utility company rates incurred by the building owners or their agents;

  (2) if building owners or their agents charge tenants a reasonable fee (not to exceed $5 per unit per month) for the administrative costs of sub-metering, then the fee will not be considered gross rent under Code Sec. 42(g)(2); and

  (3) if the costs for sewerage are based on the tenants' actual water consumption determined with a sub-metering system and the sewerage costs are on a combined water and sewerage bill, then the tenants' sewerage costs are treated as paid directly by the tenants.

  The guidance is effective for utility allowances subject to the effective date in Reg. §1.42-12(a)(4). Building owners or their agents may rely on the guidance for any utility allowances effective no earlier than the first day of the building owner's tax year beginning on or after July 29, 2008. The Treasury Department and IRS invite taxpayers to submit written comments on issues relating to this guidance.

Notice 2009-44, 2009FED ¶46,361

Other References:

 
Code Sec. 42

  CCH Reference - 2009FED ¶4385.025

  CCH Reference - 2009FED ¶4385.55

  CCH Reference - 2009FED ¶4385.77

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 54,214.10