Income Averaging in Practice: Designations, Annual Testing & the Available Unit Rule
Opener:
Income Averaging gives LIHTC owners more flexibility—but it also gives compliance teams more to track. The election may happen once, but unit designations, qualified groups, over-income households, and annual reporting have to stay aligned year after year.
📌 Introduction
Income Averaging sounds simple enough:
Mix units at different income levels, keep the average at or below 60% AMI, and move on.
Not quite.
The flexibility comes with some very specific compliance responsibilities—and several of the rules have evolved since Income Averaging was first introduced.
👉🏾 Unit designations must be documented correctly
👉🏾 The project must maintain a compliant qualified group of units
👉🏾 The 140% Available Unit Rule is not calculated the same way for every IA designation
👉🏾 And current IRS rules require annual identification and reporting of the units being used to satisfy the applicable tests
This is one of those compliance areas where strong tracking can save you from a very uncomfortable monitoring review.
🧾 First: Know What Income Averaging Actually Requires
The Average Income Test is one of the federal minimum set-aside options available under Section 42.
Under the election, generally at least 40% of the residential units must be part of a qualified group of rent-restricted, income-qualified units whose designated imputed income limitations average 60% AMI or less.
Permitted designations are:
20% • 30% • 40% • 50% • 60% • 70% • 80% AMI
The minimum set-aside election is made on Form 8609, and once made, that election is irrevocable.
👉🏾 But here is an important distinction: Form 8609 is not your unit-by-unit designation schedule.
Those individual unit designations must be maintained as part of the owner’s compliance records and reported to the housing credit agency as required.
📍 Step 1: Confirm Your Baseline
Before running a single average, make sure you know exactly what governs the project.
Review:
The Form 8609 for each applicable building
The Average Income election
Whether the buildings are treated as one multiple-building project
The LURA or Extended Use Agreement
The current unit designation schedule
Prior Annual Owner Certifications and agency reporting
State housing finance agency requirements
👉🏾 If your software, worksheet, LURA, and agency records are telling four different stories, stop there before doing anything else.
Reconcile the baseline first.
Income Averaging is complicated enough without testing bad source information.
🏷️ Step 2: Designate Units Correctly
A unit’s initial imputed income limitation must be designated no later than when the unit is first occupied as a low-income unit.
The designation must also be recorded in the owner’s books and records and retained as part of the project’s compliance documentation.
That means the designation should never look like:
“We have an 80% applicant, so let’s just call this vacant unit an 80% unit.”
There needs to be an actual compliance strategy behind the designation.
Can a designation ever change?
Yes.
The federal Income Averaging regulations allow designations to be changed when the applicable requirements are followed.
But:
👉🏾 The new designation must be formally recorded
👉🏾 The previous designation must remain in the project records
👉🏾 The change must be reported to the housing credit agency as required
👉🏾 You cannot simply go back after the taxable year closes and rewrite designations because the project average worked better another way
The current regulations preserve flexibility to redesignate units—but they also require a clear audit trail.
📊 Step 3: Understand the Qualified Group
This is one of the biggest areas where Income Averaging guidance has evolved.
The federal rules do not require every low-income unit in the project to be included in the group used to demonstrate satisfaction of the minimum Average Income Test.
Instead, the owner identifies a qualified group of units that:
✔️ Meets the required minimum percentage of residential units
✔️ Individually qualifies as low-income
✔️ Has an average imputed income designation of 60% AMI or less
There may also be a different or larger qualified group used when determining the applicable fraction.
For each taxable year, the owner must identify the qualified groups being used, maintain those identifications in the project records, and communicate the required information annually to the housing credit agency.
📂 Where Does the Annual Reporting Happen?
The IRS gives housing credit agencies flexibility to determine the time and manner in which this information is submitted.
For many properties, the state agency will incorporate this information into its:
Annual Owner Certification (AOC)
Annual compliance reporting package
Online compliance porta
lOr another agency-specific annual submission
👉🏾 Always follow the current requirements of the agency monitoring the property.
And one distinction worth remembering:
The state agency AOC is not the same thing as IRS Form 8609-A.
Form 8609-A is the owner’s annual federal tax statement filed for each year of the 15-year compliance period to report LIHTC compliance and calculate the credit.
Two annual processes. Two different purposes.
📐 Step 4: Run the Average Test
The math itself is simple.
Add the designated imputed income limitations for the units in the qualified group and divide by the number of units.
📊 Example: Project Average
Five units are designated:
40%50%60%70%80%
Calculation:
40 + 50 + 60 + 70 + 80 = 300
300 ÷ 5 = 60%
👉🏾 Average designation: 60% AMI
The group passes the average test.
But remember:
The calculation is only as good as the units included in it.
Each unit included in the qualified group must otherwise meet the requirements to be treated as a low-income unit.
🚨 Step 5: Get the 140% Rule Right
This is probably one of the most important pieces of this entire post.
For an Income Averaging property, the over-income threshold is not simply 140% of every unit’s individual designation.
Under the federal IA Available Unit Rule, a unit becomes over-income when household income exceeds 140% of the greater of:
60% AMI
OR
the unit’s designated imputed income limitation.
That distinction matters.
📊 What Does That Look Like?
Unit Designation | Base Used for AUR | 140% Threshold |
20% | 60% | 84% AMI |
30% | 60% | 84% AMI |
40% | 60% | 84% AMI |
50% | 60% | 84% AMI |
60% | 60% | 84% AMI |
70% | 70% | 98% AMI |
80% | 80% | 112% AMI |
👉🏾 Yes—a 40% unit and a 60% unit both use an 84% AMI threshold when determining whether the household has crossed the federal IA over-income threshold.
That is very different from simply multiplying every individual designation by 140%.
📊 Example 1: 50% Unit
A household occupies a unit designated at 50% AMI.
At a later required income review, the household is now at 80% AMI.
A common mistake would be:
50% × 140% = 70%
and therefore treating the household as over-income.
That is not the IA rule.
Because 60% is greater than the unit’s 50% designation:
60% × 140% = 84%
The household at 80% has not crossed the federal AUR threshold.
👉🏾 No AUR trigger yet.
📊 Example 2: 80% Unit
For an 80% unit:
80% × 140% = 112%
If the household reaches 105% AMI:
👉🏾 The household has not crossed the AUR threshold.
If the household reaches 115% AMI:
👉🏾 The over-income threshold has been crossed, and the Available Unit Rule must be addressed.
🏠 Step 6: Follow the Available Unit Rule Beyond the Recert
Crossing the threshold does not automatically disqualify the existing household or immediately turn the occupied unit into a market-rate unit.
The unit can continue to be treated as low-income when the applicable requirements are followed—including keeping the unit rent-restricted and properly handling the next available comparable or smaller unit in the same building.
And this obligation does not end when you finish the certification.
It follows the next applicable vacancy.
That is why an AUR tracking system matters.
Your tracking should clearly identify:
Over-income unit
Date the threshold was exceeded
Building
Unit size
Current designation
Next available comparable or smaller unit
Designation applicable to the available unit
New household qualification
Occupancy date
AUR obligation status
👉🏾 If your only evidence of the AUR analysis is one note buried inside last year’s certification, you do not really have an AUR tracking process.
🔄 What Happens When the Next Unit Is Market Rate?
Income Averaging adds another layer here.
If the next available comparable or smaller unit was already a low-income unit, its existing imputed income designation generally controls.
If the available unit was not previously a low-income unit, the designation used must be one that allows the project to continue satisfying the applicable Income Averaging requirements.
That is exactly why your unit mix and AUR tracking cannot operate in two separate worlds.
One decision can affect the other.
💰 Don't Confuse the Income Designation With the Rent
The unit designation affects both:
The household income limitation
AND
The maximum gross rent
But they are still separate calculations.
For an IA unit to qualify as rent-restricted, the maximum gross rent is tied to the applicable imputed income limitation for that unit.
And one more important distinction:
👉🏾 The gross rent floor is not a minimum amount the resident must pay.
It is part of the Section 42 rules governing how maximum gross rents are protected when income limits decline.
Keep your:
Income limit
Unit designation
Maximum gross rent
Utility allowance
clearly separated.
📅 Step 7: Make IA Testing an Annual Process
Income Averaging is not something to revisit only when a monitoring notice lands in your inbox.
Current federal procedures require owners to identify annually:
✔️ The qualified group used to satisfy the Average Income Test
✔️ The qualified group used when determining the applicable fraction
Those identifications must be maintained in the owner’s records and communicated annually to the housing credit agency in the time and manner established by that agency. The current final procedural regulations apply to taxable years beginning on or after September 30, 2025.
For many properties, that reporting will be incorporated into the Annual Owner Certification or other annual agency compliance submission.
💡 One Update Worth Knowing
The current regulations also provide a process for correcting a previously reported qualified group if a later-discovered compliance problem means the originally reported group does not work.
But that flexibility does not mean the owner can retroactively redesignate units after the taxable year has closed simply to make the average work.
There is a difference between:
Correcting the qualified group used for testing
and
rewriting a unit designation after year-end.
That distinction matters.
⚠️ Where IA Testing Goes Wrong
❌ Calculating AUR as 140% of every individual unit designation
❌ Using 140% of 60% for 70% and 80% units
❌ Testing the household against the project average instead of the applicable unit requirements
❌ Assuming Form 8609 contains the unit-by-unit designation schedule
❌ Changing designations without maintaining the required documentation
❌ Trying to retroactively redesignate units after year-end
❌ Failing to identify the qualified groups annually
❌ Letting the AUR analysis end at recertification instead of following the next vacancy
❌ Confusing the gross rent floor with a minimum resident rent
❌ Assuming the software calculation must be correct because the report looks good
👉🏾 Most IA findings are not because the concept is impossible.
They happen because the tracking broke down somewhere between the election and the day-to-day operation.
🔍 IA + HOTMA: Keep the Rules in Their Proper Lanes
HOTMA did not rewrite the federal Income Averaging election, the permitted designation bands, the 60% average requirement, or the IA Available Unit Rule.
What HOTMA can affect is the annual income determination being used to test the household, as the applicable LIHTC monitoring agency incorporates the updated income rules into its compliance requirements.
👉🏾 But do not import HUD adjusted-income deductions into the LIHTC calculation.
👉🏾 And do not assume every housing credit agency implemented every HOTMA-related requirement on exactly the same timeline.
Always follow the current guidance of the agency monitoring the property.
💻 Your IA Tracking System: Software + Compliance Worksheet
By 2026, most properties are using property management or compliance software to track at least part of their Income Averaging compliance.
And they should be.
Depending on the platform and setup, your software may track:
Unit designations
Household income
AMI limits
Maximum rents
Certification history
Over-income status
Unit occupancy
Available units
AUR flags
Annual reporting data
But technology does not eliminate compliance oversight.
👉🏾 A system is only as accurate as the information entered into it.
An 80% unit entered as a 60% unit can still generate a beautiful report.
It is just a beautifully organized wrong report.
Software + Worksheet = Stronger Control
I recommend using the property management/compliance system and maintaining an IA compliance worksheet or equivalent secondary control.
Think of it this way:
Your software manages the day-to-day data.
Your IA worksheet helps you independently test the compliance story.
The worksheet does not need to duplicate every field sitting in your software.
It should give you the information necessary to see the project-wide IA picture and independently confirm that the pieces still line up.
📊 What Should You Track?
Your software and/or IA worksheet should allow you to confirm:
Unit number
Building Identification Number, where applicable
Bedroom size
Current unit designation
Designation effective date
Designation history
Current income limit
Current maximum gross rent
Household size
Annual household income
AUR threshold applicable to the unit
Over-income status
AUR obligation
Next available unit information
Qualified-group status
Most recent certification/review date
Most recent annual IA testAnnual AOC/agency reporting status
⚠️ One More Check
Do not assume that because your software has an Income Averaging report, the property was configured correctly.
Periodically reconcile the software and worksheet against:
The Form 8609 election
The LURA or Extended Use Agreement
Unit designation records
Prior Annual Owner Certifications
Housing credit agency records
Annual qualified-group testing
👉🏾 Technology can make IA compliance much easier. It cannot fix bad source data.
🔄 A Practical Approach
Income Averaging becomes much more manageable when unit designations, household testing, qualified groups, AUR tracking, and annual reporting operate as one compliance process instead of five separate exercises.
Start with the Form 8609 election
Confirm the governing agreements
Reconcile the software and designation records
Identify the qualified groups
Run the average test
Test applicable households against the correct AUR threshold
Track AUR obligations through the next applicable vacancy
Document redesignations when they occur
Prepare the required AOC/annual agency information
Reconcile everything before year-end
👉🏾 If somebody asks you to prove the project complies, the answer should already be sitting in your records—not something you build after the audit request arrives.
📋 Quick IA Checklist
Before you sign off on your annual Income Averaging review, make sure you can answer yes to these:
✔️ Average Income election confirmed on Form 8609
✔️ Multiple-building project structure confirmed, where applicable
✔️ LURA and agency requirements reviewed
✔️ Current unit designations are documented
✔️ Designation history is retained
✔️ Software reflects the correct designations
✔️ IA worksheet or equivalent secondary tracking tool is current
✔️ Software and worksheet have been reconciled
✔️ Qualified group for the minimum set-aside is identified
✔️ Applicable-fraction qualified group is identified, where different
✔️ Qualified-group average is 60% AMI or less
✔️ Household income is tested against the correct unit requirements
✔️ AUR threshold uses the greater of 60% AMI or the unit designation
✔️ Over-income units are tracked through the next applicable vacancy
✔️ Unit rents correspond to the correct designations
✔️ Redesignations are properly documented
✔️ Annual qualified-group information is ready for the applicable AOC or agency submission
✔️ Internal records agree with agency records and governing documents
🎯 The Bottom Line
Income Averaging gives owners flexibility—but flexibility is not the same thing as floating rules.
👉🏾 Designations must be intentional and documented
👉🏾 Qualified groups have to be identified and tested
👉🏾 The project average has to remain compliant
👉🏾 The 140% calculation has to be done correctly
👉🏾 AUR obligations have to be followed beyond the certification that created them
👉🏾 And your software, worksheet, and agency records need to tell the same story
When the tracking is strong, Income Averaging works exactly the way it was intended to:
more flexibility without sacrificing compliance.
When the tracking is weak?
Well...that flexibility gets expensive real quick. 😏
📬 Stay in the Loop
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💼🏾 Need help reviewing an Income Averaging property before your next monitoring review?
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🔗 Reference Resources
For Income Averaging, I recommend keeping the primary federal guidance close—especially because the annual reporting and qualified-group procedures were updated more recently than many of the IA training materials still circulating.
IRS — 2025 Final Average Income Test Recordkeeping & Reporting Regulations
Covers annual qualified-group identification, recordkeeping, agency communication, corrections, and redesignations.
IRS — 2022 Average Income Test Final Regulations
The primary foundation for qualified groups, unit designations, and the Income Averaging Available Unit Rule.
IRS — Form 8609 Instructions
Covers the minimum set-aside election, including the Average Income Test and permitted designation percentages.
IRS — Form 8609-A Instructions
Useful for distinguishing the federal annual tax filing from the state housing agency’s Annual Owner Certification process.
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