Section 42 is a section of the Internal Revenue Service tax code. It provides a low-income housing tax credit for “investment in certain low-income housing buildings.” Basically, it allows property owners to claim an annual tax credit when they set aside a certain number of units in an apartment building for low-income renters. The number of low-income units needed for the credit is determined by the total number of units with a specified fraction of them set aside as low-income. This means that every unit in the apartment community might not be considered low-income, but rather there is a mix of market-value and low-income units.
To qualify for the Low-Income Housing Tax Credit (or LIHTC), a property should have at least 20 percent of the units set aside for renters with an income that’s 50 percent or less of the area median income (or AMI). An additional 40 percent of the units should be set aside for renters with an income that’s 60 percent or less of the AMI. The property must comply with the requirements for a minimum of 15 years or the credits are disallowed, and the property owner may have to pay back past credits claimed in previous years plus interest.
So basically, Section 42 Housing sets aside a certain number of units in an apartment community for those earning less than 40-50 percent of the area’s median income. Section 42 is a newer program, established as part of the Tax Reform Act of 1986. In contrast, the public housing program was established in 1933 by President Franklin D. Roosevelt. It is the nation’s longest-running housing program and 1.2 million household still live in public housing units. However, programs like Section 42 are becoming more popular because of the flexibility they provide.
How is LIHTC Rent Calculated?
Unlike other affordable housing options, LIHTC rents aren’t determined by your income, but rather by the AMI. This means that the amount of rent you pay won’t change if your income increases or decreases. However, if your income increases after you move in, you’ll have to notify the property manager in writing as soon as possible. You might have to complete the certification process again based on your new income to make sure you still qualify. If you no longer qualify, you may or may not be required to move. Depending on the property, the next available unit might be rented at the lower rate to maintain the tax credit requirements.
To calculate the LIHTC, there’s an assumption of 1.5 occupants per bedroom by the tax credit program. So, if the average income for a city is $50,000 for a one-person household and $60,000 for a two-person household, you’d find the average of those two amounts (in this case, $55,000). If the apartment is targeted to those earning 50 percent of the AMI, then the income threshold for the apartment would be $27,500.
Who is Eligible For Section 42 Housing?
To qualify for Section 42, you’ll first want to make sure that your income falls within the 30-50 percent of HUD’s median income limits for your area. In addition to income, any assets (such as any savings accounts, stocks, or bonds) will also be factored in. Personal items, like your car or furniture, are not included. The size of your family will also help determine eligibility.
In addition to qualifying initially, you’ll have to meet eligibility requirements every year when renewing the lease to make sure you still qualify. Any change of income or family size will be taken into consideration when renewing.
How to Apply For Section 42 Housing
Once you’ve determined that you are indeed qualified, you can apply directly to an apartment community that qualifies for LIHTC.
To find an LIHTC apartment, select your state at HUD.gov. Scroll to down to “Local Resources” and click on “Subsidized Apartment Search.” Follow the on-screen instructions to reach a map of your area, then click on the properties to see what they offer. For Section 42 units, look for properties that include the term “Low Income Housing Tax Credit.”
When you click on a location, a pop-up will display the apartment sizes (one-bedroom, two-bedroom) and the number of available units. Above this, you’ll see the property’s contact information.
Since Section 42 is a tax credit for the property owner and not a subsidy for the renter, you don’t have to apply through HUD to rent a Section 42 unit. You’ll simply call the leasing agent at a Section 42 eligible apartment and apply directly through them.
The leasing agent will likely ask for proof of income. They’ll also ask about your assets and the size of your family. Because the property owner will have to claim the credit every year, you’ll have to re-certify your income and household size every year in order to stay eligible for the Section 42 unit.
Section 42 Vs. Section 8 Housing
Unlike Section 8, Section 42 isn’t subsidized. You won’t receive a voucher as you would with other low-income housing programs like Section 8. Instead, the rent for those units is capped at a fixed amount, including utilities.
To qualify for Section 8, you have to apply through your local public housing authority (PHA). The requirements for Section 8 are different from Section 42, in that Section 8 is limited to US citizens and eligible immigrants. LIHTC properties may not have the same requirements, depending on whether the property accepts other federal funding with immigration status restrictions. You can ask the property manager about their requirements and restrictions when you contact them to apply.
In some states, you might find that you are placed on a waiting list for Section 8 vouchers. This is often because the demand for Section 8 is greater than availability. If this is the case in your area, try to get on several waiting lists (each city or town within the state should have one). In some cases, applicants may stay on a waiting list for more than a year.
Once you find a property that accepts Section 8 vouchers, the PHA will inspect the property to make sure it meets the requirements. If the property is approved, the applicant will receive a voucher to cover any portion of the rent that is above the 30 percent threshold.
Since a Section 8 housing voucher is provided by the government and is designed to move with the tenant, you can choose to move anywhere if you notify your PHA ahead of time and end your lease properly. The housing you choose must again meet the minimum standards of health and safety as determined by the PHA.
Since Section 42 is a tax credit for the property owner, it isn’t tied to you in any way. If you choose to move, you can do so when your lease ends. If you want to apply at another Section 42 property, you would simply repeat the process with the new property manager to qualify for the unit.
Whether it’s Section 42, Section 8, or public housing, there are a variety of options when looking for affordable rentals. Learn more about each of these programs to find an option that works best for you.
