California FTB Notice Substandard Housing Document Request (AUD 1575)

The AUD 1575 is a specific document request the California Franchise Tax Board issues during an audit when they’re examining deductions or credits related to substandard housing — typically housing that qualifies for California’s low-income housing tax credit, housing rehabilitation deductions, or similar housing-related tax benefits. The notice asks for documentation proving that the housing meets the relevant substandard criteria under California law and that the claimed deduction or credit is valid.

California has specific definitions of ‘substandard’ housing tied to Health and Safety Code Section 17920.3, which lists conditions that qualify a dwelling as substandard — things like lack of required plumbing, inadequate heating, dampness, or structural hazards. Tax benefits tied to substandard housing often require documentation from local building inspection departments or other official sources confirming the property met those standards at the relevant time.

If you received an AUD 1575, the FTB is questioning whether housing you claimed a deduction or credit for actually meets California’s substandard classification. The response needs to come from the right sources — not just your own records, but official documentation from the relevant government agencies.

The AUD 1575 typically asks for documentation from local building inspection authorities confirming the property’s substandard status, any correspondence with local code enforcement, rehabilitation cost records showing actual expenditures, contractor invoices and lien releases, permits pulled for any rehabilitation work, photos of the property before and after any improvements, and the tax credit certification documents if a formal credit program was involved.

If the deduction involves the California Low-Income Housing Tax Credit (LIHTC) under California Revenue and Taxation Code Section 17058, there are additional documentation requirements — including a tax credit allocation from the California Tax Credit Allocation Committee (CTCAC), a partnership or LLC operating agreement, and annual compliance reports. The FTB’s audit of LIHTC projects is particularly detailed and often involves coordination between the FTB and CTCAC.

We organize AUD 1575 responses by working backward from the tax position claimed: what does the law require to support this deduction or credit, and do we have documentation satisfying each element? Often clients have some of the required documentation but not all. We identify gaps early and work to fill them from official sources — building department records, county assessor files, and CTCAC documentation — before the response deadline.

California’s primary tax credit for substandard and low-income housing is the California Low-Income Housing Tax Credit (LIHTC) under California Revenue and Taxation Code Section 17058. This credit is available to investors in qualifying low-income housing projects and can be worth up to $1.30 per dollar of qualified basis in the project. California’s credit works alongside the federal LIHTC under IRC Section 42 but has its own allocation process through the CTCAC.

Beyond LIHTC, California also allows deductions for rehabilitation expenditures on certain older structures and for costs associated with bringing substandard housing up to code. These aren’t always formal ‘credit’ programs — sometimes they’re just ordinary and necessary business expense deductions for landlords. The AUD 1575 is the FTB’s request to substantiate whichever benefit is at issue, whether that’s a formal credit or an ordinary deduction.

The Reed Corporation handles audits involving California housing tax credits as part of our broader real estate tax practice. These audits require coordination with the project partnership or LLC, the tax credit syndicator, and sometimes the CTCAC directly. We’ve handled AUD 1575 document requests for both individual investors in LIHTC partnerships and for property owners claiming rehabilitation deductions on their Schedule E.

California relies primarily on Health and Safety Code Section 17920.3 to define substandard housing. That section lists specific conditions — including lack of required plumbing or heating, inadequate sanitation, dampness or mold, structural hazards, overcrowding, and inadequate egress — any of which can render a dwelling substandard. The classification typically requires an official determination by a local building official or code enforcement authority, not just a taxpayer’s own assessment.

For tax credit purposes under the California LIHTC program, ‘substandard’ also intersects with income-targeting requirements — the housing must be occupied by tenants earning at or below specified percentages of area median income (AMI), usually 60% AMI or lower. The FTB’s AUD 1575 request often focuses on both the physical condition documentation and the tenant income certification documentation to verify the project qualifies under both prongs.

Where things get complicated: a property can be physically substandard but still fail to qualify for a California tax benefit if it doesn’t meet all the program-specific requirements. And a property that previously qualified can lose its status if conditions are cured without following the formal process for the relevant credit program. We read the AUD 1575 carefully to understand exactly which qualification criteria the FTB is questioning before assembling the response.

If you can’t produce every document the AUD 1575 requests, the FTB will typically disallow the deduction or credit in full or in part. The amount they disallow depends on what’s missing — if you can document the physical substandard condition but not all the rehabilitation costs, they may allow the credit based on a reduced cost basis. If you can’t document the core substandard classification at all, the entire benefit is at risk.

The FTB does accept secondary evidence when primary documentation is unavailable. If building department records were lost in a fire or the local agency destroyed old inspection reports, a sworn statement from a credible witness — a contractor who did the work, a former building inspector — combined with whatever secondary records exist (photos, permits that reference conditions, contractor correspondence) can sometimes substitute for the primary document. It’s a harder case to make, but not impossible.

Document retention matters more for housing credit investments than almost any other tax position because the credits span 10 to 15 years and the FTB can audit throughout that compliance period. We advise clients who hold LIHTC investments to maintain organized documentation files for the life of the credit plus four years. If you’re facing an AUD 1575 with gaps in your records, call us — we’ve reconstructed documentary support from alternative sources in more than a few situations.