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Section 42 is a code of the IRS tax code. Developing affordable housing through Section 42 can earn developers tax credits for creating and maintaining those units. The Tax Reform Act was passed in 1986, creating the Section 42 program administered by the Internal Revenue Service (IRS). Affordable, safe, decent housing is provided for low-income households under the program.
Through Section 42, also known as the Low-Income Housing Tax Credit (or LIHTC), a tax credit is available to apartment owners who set aside some units for the housing of low-income people. Section 42 provides building owners an opportunity to invest in low-income housing buildings.
Under Section 42, participating landlords can claim an annual tax credit if they allocate some of the units of the apartment buildings they own to low-income tenants. The objective of having developers set aside some of their units for low-income residents is to keep rent at or below a certain level to be affordable for the homeless and poor individuals and families.
A specified fraction of all units are set aside as low-income units to determine the number of units needed for credit. A mix of market-value and low-income units may exist in the apartment community, so not every unit might be considered low-income rental housing.
Read on to get more information on how a landlord can apply for Section 42 housing benefits for their apartments to provide housing assistance to elderly residents and households with income levels under the federal poverty line.
If you are homeless and pregnant, read our blog post on affordable housing for pregnant women.
Section 42 vs. Section 8 Housing
Section 8 differs from Section 42 since the Section 42 program is not subsidized. Under the Section 8 program, eligible participants get rent assistance through vouchers, which is not the case for Section 42 beneficiaries.
Instead of giving vouchers to Section 42 participants to get a discount on their rent, fixed caps are placed on their rent (including utilities).
The application process is more formal for Section 8 applicants who must apply through their local PHAs.
On the other hand, Section 42 participants are essentially landlords and apartment building owners. Potential tenants only need to apply for Section 42 housing through the leasing agent for the property. Section 8 Housing Choice Vouchers are available to US citizens and eligible immigrants, while Section 42 properties have stricter requirements. Eligible immigrants can apply for Section 42 if the property gets federal funding with no immigration status restrictions.
Section 8 voucher applicants may be placed on a waiting list in some states. Section 8 is often in short supply due to high demand. You can try getting on as many waiting lists as possible (there should be one in each city or town within the state if this is the case).
A waiting list can last up to one year in some cases. PHAs inspect properties that accept Section 8 vouchers to ensure they meet the guidelines once they receive your application. A voucher will cover any portion of the rent above the 30 percent threshold if the property is approved.
If you give notice to your PHA ahead of time and end your lease properly, you can move anywhere using a Section 8 housing voucher provided by the government. You must choose housing that meets the PHA’s minimum health and safety standards.
This tax credit goes to the property owner and is not owed to you. Upon expiration of your lease, you can move. A new property manager could assist you if you wish to apply at another Section 42 property.
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How to Qualify For Section 42 Low-Income Housing Tax Credit
The Low-Income Housing Tax Credit (LIHTC) is available to renters below 50 percent of the area median income (AMI). A property must have at least 20 percent of its units set aside for low-income households.
There should also be 40 percent of the rental units reserved for people with incomes under 60 percent of the area’s median income. The property owner may be required to repay past credits plus interest if the property does not comply with the requirements for a minimum of 15 years.
Section 42 Housing provides apartment units in an apartment complex for people who earn less than 40-50 percent of an area’s median income. Many affordable housing programs, including HOME Investment Partnerships, use Section 42 housing. Besides the District of Columbia, Guam, and Puerto Rico, all 50 states are included in the program.
Section 42: Eligibility Criteria
To qualify for living on a LIHTC property, you must meet income and student status requirements. Following program requirements, the property manager must verify the income and assets of all household members.
Once the total income on the property has been determined, the household income is compared with the income limit. Households below 25%, 50%, or 60% of area median income (AMI) can apply for Section 42 units. It is eligible for the household to move into the property if it is income eligible.
The household must also meet student status eligibility requirements. LIHTC units are not available to households with full-time students. This rule does not apply to all cases, however. Students must fill out forms during the application intake process to determine their eligibility based on regulations and exceptions.
When determining eligibility, income alone is not considered. Other assets such as bonds, savings accounts, and stocks are also factored in. But your possessions, such as cars and furniture, are not. The family size is also helpful in determining eligibility for the Section 42 housing program.
Besides meeting eligibility requirements initially, you must meet them every year to renew the lease. The renewal process will consider any income or family size changes.
The federal government mandates that HUD determines whether a person’s income qualifies them to live in a Section 42 community in their county or metro area. Before being accepted into a Section 42 community, you must provide proof of your income, which is reviewed annually.
Benefits Of Section 42 Housing
Apart from their affordability, section 42 apartments are often located in areas where the average rent is too high for low-income residents. Previously expelled residents now have access to local amenities and employment opportunities.
Besides your landlord, your property manager will be responsible for maintaining your apartment. Your landlord will only receive the tax benefit if the unit meets certain maintenance and safety requirements. The fire extinguishers and appliances need to be in good working condition. Your landlord should at least repair or replace it as soon as possible.
Finally, the landlord takes care of many utilities in Section 42 apartments. There are usually no inclusions for the internet or electricity, but you could save on other expenses such as trash collection, gas, and heating that don’t require electricity.
What Will I Pay In Rent?
When determining the amount you’ll be paying in rent, the restrictions on the property and the county where you are applying will decide whether you can live there.
The property can include units with rent limits ranging from 25% to 60% of AMI, depending on the county. Compliance with program requirements is strictly monitored and restricted.
Applying For Section 42 Housing
You can apply directly for Section 42 housing after determining that you qualify. Use the following process to apply:
- You must visit the HUD website to find available Section 42 apartments.
- Scroll down to choose ‘Local Resources’ and click on ‘Subsidized Apartment Search.’
- Follow the instructions on your screen to find a map of your area that displays all the available properties.
- Look for properties that include “Low Income Housing Tax Credit” in their description.
- Choose the Section 42 property that suits your needs in terms of the apartment size and number of available units.
- Use the leasing agent’s contact information and contact them to apply.
- The leasing agent will seek proof of your income and information about your family size and other assets.
Please note that you’ll need to certify your income level and family size annually to continue residing in the Section 42 unit.
If you cannot meet the Section 42 housing program’s eligibility requirements or have a long waiting list, read our article on government housing grants for low-income families and individuals.