Legal Developments: LIHTC and The Fair Housing Act

4 min read

What Does ‘For Use By the General Public’ Mean?

There is no end to the complicated, arcane rules applicable to Low Income Housing Tax Credits (LIHTCs) and the properties they help to build. But, because of the practical problems that may arise from noncompliance, it is especially important that owners, investors, legal advisors and property managers are aware of the requirements of the IRS Regulation §1.42-9—the so-called “General Public Use Rule”—and how it may jeopardize a property’s LIHTCs.

Expressed in starkly negative terms, the General Public Use Rule provides that “[i]f a residential rental unit in a building is not for use by the general public, the unit is not eligible for a section 42 credit.” 26 CFR §1.42-9(a). The rule says, that “[A] residential rental unit is for use by the general public if the unit is rented in a manner consistent with housing policy governing non-discrimination, as evidenced by rules or regulations of the Department of Housing and Urban Development (HUD).”1 Id.

In a Memorandum of Understanding issued more than two decades ago, HUD, the Justice Department (Justice/DOJ) and the Internal Revenue Service (IRS) (jointly, the Agencies) take the position that “[i]n accordance with § 1.42-9 of the Income Tax Regulations . . . LIHTC properties are to be rented in a manner consistent with the [Fair Housing Act (FHAct)].” The Memorandum of Understanding between HUD, DOJ and IRS dated Aug. 11, 2000, is available at (last viewed on Oct. 12, 2021).

What happens, however, if an owner violates the requirements of those fair housing regulations? The consequences can be severe. In the Memorandum of Understanding, the agencies outlined a process to share information about fair housing cases where there is a “charge” (essentially, a finding of probable cause that a violation occurred, made after a HUD investigation), a probable cause finding by a “substantially equivalent” state agency, a lawsuit under the FHAct filed by Justice, or a settlement agreement or consent order entered into by HUD or Justice and the owner of a LIHTC property. HUD and Justice will transmit this information to the state tax-credit-issuing agency, which will then notify IRS. IRS then sends a letter to the property owner, “notifying them that a finding of discrimination [including an adverse final decision by HUD, a substantially equivalent state agency or federal court] could result in the loss of LIHTCs.” Id. at 2. IRS will also send the owner a letter warning about the loss of tax credits if a court enters a judgment enforcing the terms of a settlement agreement or consent order. Id.

The Memorandum of Understanding effectively focused the attention of LIHTC owners, developers and property managers, none of whom want to risk the loss of tax credits. The scope of the risk they face can vary. For example, a finding of discrimination against a single tenant may jeopardize the LIHTCs for that tenant’s unit during the duration of any violation. But what happens if an entire property is determined to have been in violation of the FHAct’s accessible design requirements since the property was originally constructed? Presumably, all accumulated tax credits could be at risk.

Fortunately, the vast majority of FHAct complaints are settled before any “adverse” decision (or even a charge or finding of probable cause) is issued. Nevertheless, the General Public Use Rule—and the risk of losing tax credits—has helped property owners and investors to attend to fair housing issues and police their operations to stay on the right side of the FHAct. With a nod to Samuel Johnson, nothing concentrates one’s attention so well as the contemplation of the gallows.

Harry J. Kelly is a partner in law firm Nixon Peabody LLP’s Affordable Housing & Real Estate practice, focusing on a wide range of housing issues, both transactional and litigation-related. He routinely advises a variety of clients in developing policies to comply with fair housing and antidiscrimination laws (including reasonable accommodations and accessible design standards) and related occupancy issues.