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Section 42 Tax Credit: What It Is, Requirements and How It Works

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You might have heard of Section 42 Tax Credit.

It’s one of the most popular affordable housing laws and is used around the country to get low-income residents into safe and sturdy apartments.

If you’re wondering what Section 42 tax credit is and how to apply, read on.


What is Section 42 Tax Credit?

Section 42 Tax Credit is a tax incentive placed by the federal government.

Also known as the Low Income Housing Tax Credit, Section 42 is helpful for investors and renters.

This incentive is for investors and builders-they receive a tax credit for every dollar they spend on building low-income housing units.

With a dollar-for-dollar tax credit, many investors will find it worthwhile to build low-income fair housing as part of their urban development.

Existing housing units can claim this credit by setting aside at least 20% of their apartments to become low-income, which, in turn, benefits the lower-income population in cities all over the country.

Eligible residents can move in and pay a fraction of the regular rent.

How is Low Income Housing Tax Credit Rent Calculated?

Instead of calculating your rent based on your income, low-income housing for section 42 is calculated using the average monthly income of the local city.

Each housing unit is aimed at renters who make a certain percentage of the average income.

Usually, to qualify, you need to make at most half of the average monthly income in the city.

The rent is calculated based on the averages in the local city and then capped.

Qualifying renters can move in and must notify their landlord if their income changes in any way.

They might be required to requalify.

What are the Benefits of Section 42 housing?

One of the biggest benefits of section 42 housing is that the rent is capped.

Other low-income rentals will calculate rent based on your current income and raise or lower it depending on how much you make.

Section 42, however, caps the rent at a specific pay rate, not forcing you to pay more if you make more.

Often, a building with section 42 housing will also offer regularly priced rental units.

If your income goes up and you stop qualifying for the tax credit housing, you might be able to stay in the same apartment complex and save the hassle of moving again.

How to Find Section 42 Housing

If you’re looking for low-income housing, you might be frustrated.

Many apartment buildings don’t list their requirements or which low-income section they follow.

For section 42 housing, you’ll have to use official resources to find apartment buildings in your area.

To find section 42 housing, you can look at the HUD website.

This website will help you narrow down the area by city, state, and zip code.

It will also give you individual requirements for apartment buildings.

Remember, various section 42 housing will have higher or lower average incomes.

Section 42 vs. Section 8 Housing

Section 42 and Section 8 housing are easy to confuse because they both cater to low-income renters.

However, Section 42 has a rent cap, whereas Section 8 housing is funded by the national government.

For Section 42 housing, the rent is determined by the area.

There is a cap, but the resident is responsible for utilities.

Section 42 landlords do not receive subsidies from the government for low-income housing.

Instead, they get a tax credit and receive private investors to fund the housing.

Section 8 housing, on the other hand, works hand in hand with the federal government.

It takes 30% of the renter’s adjusted monthly income, and the government pays the rest of the rent bill every month.  

Both sections are helpful to low-income families.

However, the requirements differ.

While Section 8 housing, the resident will apply through the government.

The price of the rent will shift if income shifts.

However, Section 42 housing depends largely on the local housing authorities.

Do You Qualify for the Section 42 Housing?

If you have a lower income and are wondering whether you qualify for section 42 housing, there are a few easy steps you can take to find out.

Most people who apply do qualify, but you want to make sure before you start looking for housing.

It will be easier for you to research individual housing units and your city’s average monthly income, but you will go into a qualification appointment ready with your research.

Usually, section 42 housing requires you to make less than 50% of the average monthly income in your city.

Eligibility Criteria

The main criteria for section 42 housing are that you can’t pay regular rent, which will vary by city, but the interviewers will look at multiple factors, including:

  • Average monthly income
  • Family size
  • Bonds and other assets
  • Current Employment
  • Current schooling
  • Number of salaries in the family
  • Revenue procedure

Eligible Types of Housing

Each of these criteria will be looked at to ensure that you are eligible for housing.

As long as you can prove that you won’t be able to pay regular rent, most housing societies will put you in a qualified allocation plan.

Every income in your household will be taken into account.

If your partner also makes money, the average of both of your incomes must be below half of the city’s average monthly income.

If one of you makes a little more than half the average, it probably won’t ruin your chances of getting rental housing.

The average is taken.

The most important thing to know is your monthly income.

If the monthly income of you and anyone you live with averages out to 30-50% of the area median income in your city, you will likely qualify for section 42 housing.

You won’t qualify for section 42 housing if you make too much.

However, unemployment can also hurt your chances.

Even though the rent is lower for this type of quality housing, it’s essential that you can pay the rent each month.

If you make less than 30% of the average monthly income, it might not be enough for you to qualify for every apartment building.  

Eligible Applicants

Anyone applying for low-income housing has to be ready to prove that they qualify.

Families, couples, and individuals are welcome to apply.

However, full-time students will not qualify unless they are already receiving certain benefits.

If you are in the process of applying and interviewing for a higher-paying job, hold off on applying for low-income rental properties.

If you get the job, you might not qualify and will have to re-apply to another type of affordable rental housing.

Eligible Residents

Existing residents who lose a job or have a sudden decrease in income may be eligible to apply for low-income housing in their building.

Depending on the rental company, you may have to move to a designated low-income apartment, or you can stay in your current home, and they will change the paperwork.

Again, you will likely qualify as long as you can prove that you can’t feasibly pay the rent each month.

Ensure that your building offers low-income housing and that it’s section 42 before you try to apply.

How Do I Apply for Section 42?

To apply for section 42, you first need to calculate your average monthly income with the monthly income of the city in which you live.

Do the research and make sure you will qualify for the housing you are looking at before applying.

Application Process

Once you’ve done the research, the application process is relatively easy.

Although it varies per state and city, most will look at your family size, financial records, and average monthly income before making a decision.

First, you’ll have to find an apartment building that offers section 42 housing.

When you fill out an application, the landlord will see that you are applying through section 42.

It’s just as easy as filling out a regular apartment application-the qualification process comes later.

What Do I Need to Apply?

To apply for affordable housing, all you need to know is which apartments you are applying for.

The registration process works the same as regular housing.

However, when the agent contacts you after reading through your application, they will likely ask for the following information:

  • Proof of income
  • Family size
  • Assets

Other than these main factors, the housing society won’t look at much more.

If you have these ready when the agent contacts you, the process will run more smoothly, and you’ll be able to move in as soon as possible.

Final Thoughts

Section 42 is an incredibly helpful tool for lower-income families to get settled and be able to pay rent.

As long as your monthly income is below half of the city’s area median income, you will be able to qualify for most section 42 homes.

Soon, you and your family can be safe paying more affordable rents in low-income housing.

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