One of the basic comforts in life is having a solid roof over your head. Unfortunately, securing a safe place to live is more difficult for some due to financial struggles. To help those with individuals, certain programs have been put into place that not only provide easier access to safe living conditions, but also provide incentive for building owners to provide such housing as well. Read on to learn more about the history of Section 42 housing, who it benefits, how to qualify for it, and more.
History of Section 42 Housing
Low-income housing tax credits, the main benefit provided under the Section 42 umbrella, were created by the Tax Reform Act of 1986 under the Reagan administration. The act included many different changes to the tax system including lower federal income tax rates, decreasing the number of different tax brackets, and reducing the top tax rate. The portion of the act that created the low-income housing tax credits, however, is (unsurprisingly) Section 42 of the Internal Revenue Service (IRS) code.
How Section 42 Housing Works
Each year, the IRS allocates a number of tax credits to each state, but not all states receive the same number of credits. To balance out the allotment, the IRS divvies up the credits by state population. Initially, the credits are allocated directly to state agencies. Then, developers that want to build affordable housing in the state apply to receive the credits. The application process is fairly rigorous and stipulates a developer’s projects must meet certain requirements in order to receive the credits in question. This can include:
- Income thresholds for potential tenants
- Specific rent limits
- Individual state considerations
Once a developer is awarded the credits, they are usually sold directly to an investor before being put to use on the construction project. By taking this step, the investment money can be used to help fund the project and keep debt low, making it possible to make the housing more affordable in the long run.
Investors that purchase the credits typically use them over a 10-year period and have compliance regulations for 15 years. In order to provide affordable housing for as many people as possible, the housing built by the aid of this program needs to remain financially accessible for a minimum of 30 years.
According to the Affordable Housing Investors Council (AHIC), Section 42 has successfully aided in the development of almost three million homes for seniors, families, veterans, the formerly homeless, and individuals with special needs. Section 42 housing developments also have a positive direct impact on the local community. Again, according the AHIC, a 100-unit housing development:
- Creates 116 jobs, around half of which are construction-related
- Injects $8.7 million to the local economy in income
- Adds $3.3 million in taxes for federal, state, and local governments
Property Owner Requirements
To secure a Low-Income Housing Tax Credit (LIHTC), at least 20 percent of a property’s units must be set aside for renters with an income that’s 50 percent or less than the area medium income (AMI). Additionally, a unit should have at least 40 percent of the remaining units set aside for renters with an income that’s 60 percent or less of the AMI.
Section 42 Housing is not dictated by income. This means that the rent of someone living in an affordable housing unit will not decrease if their income decreases. If their income increases while living in the affordable housing unit, however, they may need to re-certify to ensure they’re still eligible for the program. If they are not, they may or may not need to move to allow room for an eligible party to take their unit.
Finding and Applying for Section 42 Housing
For those who can’t afford other types of housing, Section 42 housing provides an invaluable resource. Just like finding any form of housing, however, securing a Section 42 unit does require some legwork and — sometimes — a bit of good timing and luck.
First, those seeking Section 42 housing should start with the Department of Housing and Urban Development (HUD). This federal office provides housing information for all states in the country and can help those seeking affordable housing narrow down their search down to states and even specific zip codes.
Once an affordable housing building has been found, individuals can see the various eligibility requirements they need to fit into to be considered for a unit. It’s important to note that because Section 42 is a tax credit program for property owners, potential renters are not applying for affordable housing through HUD. Instead, interested renters will apply for the affordable housing directly through the leasing office of any particular building.
Specific eligibility requirements for affordable housing may differ, but a leasing agent will typically ask for proof of income, list of assets (items such as cars and furniture and usually not included), and size of the family in question. If an individual is accepted, they will need to re-certify each year because the property owner must claim the tax credit each year as well.