Over-Income Tenants at Recertification: The 140% Rule and What Comes Next.
- edlenore920
- Mar 4
- 6 min read
Introduction
It happens every recertification season: a tenant's income has gone up—sometimes way up—and now your compliance team is scrambling. Are they still eligible? Do they have to move? Can you still count the unit?
The answer depends on how far over the limit they are, and whether you follow the right steps afterward. LIHTC has a specific framework for handling over-income tenants, anchored by the 140% rule and the Available Unit Rule. Get it right, and the unit stays in compliance. Get it wrong, and you could lose credits.
Let's walk through it.
The 140% Rule: When Does a Tenant Become "Over-Income"?
At annual recertification, you recalculate each household's income. If their income has increased, the question is: how much?
Under Section 42 of the Internal Revenue Code, a tenant is considered over-income when their household income exceeds 140% of the applicable income limit for the unit's designation.
How to Calculate the 140% Threshold
Identify the unit's income designation (e.g., 60% AMI)
Look up the current income limit for that designation and household size
Multiply by 1.4 (140%)
Compare the tenant's recertified income to that number
Example:
Unit designated at 60% AMI
Current 60% AMI income limit for a family of 3: $42,000
140% threshold: $42,000 x 1.4 = $58,800
Tenant's recertified income: $55,000 — Still qualified (under 140%)
Tenant's recertified income: $61,000 — Over-income (exceeds 140%)
What 140% Means in Practice
Below 140%: The tenant is still considered a qualified low-income tenant. The unit remains in compliance. No action required beyond standard recertification documentation.
Above 140%: The tenant is over-income. This triggers the Available Unit Rule.
Important: The tenant does NOT have to move out. Over-income status does not mean eviction—it means the next available comparable unit must be rented to a qualifying household.
The Available Unit Rule
When a tenant exceeds the 140% threshold, the Available Unit Rule kicks in. This is the mechanism that keeps your property in compliance despite having an over-income tenant.
How It Works
The over-income tenant stays. They can remain in their unit and continue paying rent. They are now a "market-rate" tenant for credit purposes, but they don't have to leave.
The next available comparable unit must be rented to a qualifying tenant. "Comparable" means a unit of the same size (number of bedrooms) and in the same building.
The unit must be rented at the restricted rent. The replacement unit must be leased at or below the applicable LIHTC maximum rent for its designation.
Until a comparable unit is rented to a qualifying tenant, the over-income tenant's unit is treated as a low-income unit. This gives you a grace period—but only if you fill the next comparable vacancy correctly.
If you fail to rent the next comparable unit to a qualifying tenant at a restricted rent, the over-income tenant's unit loses its status. This is where credit recapture risk begins.
What "Available" Means
A unit is considered "available" when:
It is vacant, OR
A current tenant's lease has expired and is not being renewed, OR
A new lease is being signed
A unit is NOT considered "available" simply because a lease is month-to-month—the tenant must actually vacate or choose not to renew.
Step-by-Step: Handling an Over-Income Tenant
Step 1: Complete the Recertification
Finish the full income recertification with all required documentation. Calculate total household income using the applicable method (Part 5 or Section 42).
Step 2: Determine the 140% Threshold
Look up the current income limit for the unit's designation and household size. Multiply by 1.4. Compare.
Step 3: Document the Over-Income Status
If the tenant exceeds 140%, document this clearly in the file:
Note the income limit used
Show the 140% calculation
Record the tenant's actual income
Date the determination
Step 4: Flag the Unit for the Available Unit Rule
Notify your compliance team (and property management) that the Available Unit Rule has been triggered for this unit type. The next comparable vacancy must be filled with a qualifying tenant at restricted rent.
Step 5: Monitor Vacancies
Track all vacancies in comparable units. When one becomes available, prioritize leasing it to a qualified low-income applicant at the restricted rent.
Step 6: Document Compliance
When the next comparable unit is rented to a qualifying tenant:
Document the new tenant's qualification
Note that the Available Unit Rule has been satisfied
The over-income tenant's unit continues to count as low-income
Income Averaging Complications
For properties using income averaging, the over-income analysis adds a layer of complexity:
Which Income Limit Applies?
The 140% threshold is based on the unit's specific AMI designation, not the property-wide 60% average.
A unit designated at 40% AMI: 140% threshold = 140% of the 40% AMI limit
A unit designated at 80% AMI: 140% threshold = 140% of the 80% AMI limit
Example:
Unit designated at 40% AMI
40% AMI income limit for a family of 2: $28,000
140% threshold: $28,000 x 1.4 = $39,200
A tenant earning $40,000 is over-income for a 40% unit—but would be well within limits for a 70% or 80% unit
Redesignation as a Strategy?
Some owners consider redesignating a unit to a higher AMI tier to avoid triggering the Available Unit Rule. Be careful:
Redesignation must still maintain the property-wide 60% average
The redesignation must be documented and legitimate—not just a paper exercise to avoid the rule
Your syndicator and state HFA should be consulted before redesignating
Some state HFAs have restrictions on when and how redesignations can occur
Comparable Units Under Income Averaging
"Comparable" for the Available Unit Rule means the same size unit—but for income averaging, the replacement unit must also be rented at a rent that is at or below the applicable LIHTC rent for its designation. If you're filling a comparable unit at a 30% AMI designation to satisfy the rule, the rent must be at or below the 30% AMI rent limit.
What About Rent for Over-Income Tenants?
Once a tenant exceeds the 140% threshold:
You are NOT required to raise their rent — but you can, subject to lease terms and state/local law
The unit is no longer rent-restricted for that tenant (the LIHTC maximum rent no longer applies to them specifically)
However, if the Available Unit Rule hasn't been satisfied yet, treating the unit as market-rate before compliance is restored could jeopardize your credits
Best Practice: Continue charging the restricted rent until the Available Unit Rule is satisfied, then evaluate whether a rent increase is appropriate
Common Mistakes
Evicting over-income tenants — LIHTC does not require you to evict anyone for being over-income. The Available Unit Rule is the remedy—not displacement.
Ignoring the 140% threshold and treating any over-income tenant as a problem — If a tenant's income exceeds the designation limit but is still under 140%, the unit remains in full compliance. No action needed.
Not tracking comparable vacancies — If you don't monitor which units are comparable and available, you can't satisfy the Available Unit Rule. This is an active management responsibility.
Failing to document the Available Unit Rule process — Auditors want to see: (1) the over-income determination, (2) evidence you tracked comparable vacancies, and (3) documentation that the next comparable unit was rented to a qualifying tenant. Missing any of these is a finding.
Using the wrong income limit for income averaging properties — The 140% threshold is based on the unit's specific designation, not 60%. A 40% AMI unit triggers at a much lower income than an 80% AMI unit.
Redesignating units without maintaining the 60% average — Redesignation can help, but if it pushes the property average above 60%, you've created a bigger compliance problem.
Documentation Checklist for Over-Income Files
Complete recertification with all income documentation
Calculate and document the 140% threshold for the unit's designation
Note whether tenant income is above or below 140%
If over-income: flag the unit and notify compliance/management
Track all comparable unit vacancies from the determination date forward
When a comparable unit is filled with a qualifying tenant, document it
Maintain a log showing the Available Unit Rule was satisfied
For income averaging: document the specific AMI designation used for the 140% calculation
Practical Tips
Build the 140% threshold into your recertification worksheet — Don't calculate it as an afterthought. Include a field that automatically shows the threshold alongside the tenant's income.
Create an Available Unit Rule tracking log — A simple spreadsheet: over-income unit, date triggered, comparable units, date satisfied. Auditors love this.
Train leasing staff — They need to know that when the Available Unit Rule is active, the next comparable vacancy MUST go to a qualified applicant at restricted rent. This isn't optional.
Coordinate with your syndicator — Over-income tenants affect projected revenue and compliance metrics. Keep your syndicator informed.
Don't panic — An over-income tenant is not a crisis. It's a manageable compliance event with a clear process. Follow the steps, document everything, and the unit stays in compliance.
The Bottom Line
Over-income tenants at recertification are a normal part of LIHTC management. The 140% rule gives tenants significant headroom before triggering any compliance action, and even when the threshold is exceeded, the Available Unit Rule provides a clear path to maintain compliance without displacing anyone.
The key is documentation, tracking, and follow-through. Know your thresholds, monitor your vacancies, and fill the next comparable unit correctly. Do that, and an over-income tenant is a non-event—not a compliance nightmare.
Need help with over-income procedures or Available Unit Rule tracking? The TCC Firm provides LIHTC compliance consulting, file reviews, and staff training. Contact us at info@thetccfirm.com for assistance.
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