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Low-income housing tax credits, available through Section 42 of the Internal Revenue Code, offer an attractive mechanism for the equity financing of multi-family housing projects serving low to moderate income individuals. The increasing popularity of assisted living facilities to serve the elderly has led developers to seek a way of blending the assisted living requirements with the mandates of Section 42. However, the income limitations imposed on residents of tax credit projects, combined with the supportive service component of assisted living, have made it difficult to build assisted living facilities with tax credit financing in Connecticut, which currently lacks available subsidies for the service aspect of assisted living. There are indications of increasing state interest in providing subsidies for assisted living which could, under the right circumstances, open the door to combining traditional avenues of financing assisted living facility projects with the equity financing available through low-income housing tax credit projects.

There remain, however, several other hurdles to the availability of tax credits. One issue which is receiving attention from the IRS, involves clarification of the nature and extent of services which an assisted living facility may offer and still qualify as “residential rental property” for tax credit purposes.

In order to meet the requirements of Section 42, a facility must be a “residential rental property.” Specifically excluded from this definition are hospitals, nursing homes, sanitariums, life care facilities and intermediate care facilities for the mentally and physically handicapped because such facilities provide continual and frequent nursing, medical and psychiatric services to its patients which would not generally be needed by the general public on a non-transient basis (two requirements of § 42).

A revenue ruling issued late last year (Rev/Rul. 98-47, 1998-39)(September 14, 1998) addresses the line between acceptable services and those which disqualify a facility from “residential rental property” classification. This ruling provides helpful guidance on what types of assisted living facilities would qualify for tax credits.

The facility at issue contained three buildings, each providing a somewhat different level of service. The first building provided only basic services to the tenants, which included:

• laundry;
• housekeeping;
• regular daily meals in the common dining room;
• 24 hour monitored emergency call service;
• planned social activities; and
• scheduled transportation to shopping, hospitals, and doctors’ offices.

The second building provided to the tenants the basic services listed above as well as the following support services:

• assistance by medication management technicians in medication management and intake;
• maintenance of detailed medication records;
• consultation with a nurse as needed about health concerns and medication plans;
• assistance by non-medically certified aides each day during waking hours in activities of daily living that included getting in and out of bed and chairs, walking, using the toilet, dressing, eating, and bathing; and
• routine checks by staff members to insure the residents’ general well being.

The third building provided all the services made available to residents in the second building, and unlike the first and second building, was staffed by registered nurses, licensed practical nurses and licensed nurses’ aides. These nurses and nurses’ aides were available to provide 24 hour nursing care for the residents’ medical or psychiatric needs.

The IRS concluded that, while residents of the first and second buildings received significant non-housing services, the first two buildings still qualify as “residential rental property” because the services rendered to the residents did not rise to the level of “continual or frequent nursing, medical, or psychiatric services” as is usually the case in a health care facility. The third building, however, was deemed not to qualify as “residential rental property” because, in addition to the support level of the first two buildings, continual or frequent nursing, medical, or psychiatric services were provided to the residents.

In summary, an assisted living facility may qualify for low-income housing credits notwithstanding that non-housing related services are offered to residents, provided that the amount of skilled nursing, medical or psychiatric care is limited. Tax credits can provide a valuable means of raising lower cost equity for the construction or rehabilitation of an assisted living facility under the right circumstances.