The potential Tenant asked the Landlord about Section 42 Housing?
Question
Recently, an applicant for one of the units in my 24-unit property asked whether my property provides for Section 42 housing. What is this about?
Answer
Section 42 housing is housing that was constructed under the Low Income Housing Tax Credit program. This is a cooperative effort between HUD and the IRS that provides tax credits to the owner. The purpose of the program is to provide more low income housing. The program sometimes is required when government financing is involved – e.g., via a state bond.
The program usually provides a tax credit of 10 percent of construction cost spread evenly over the first 10 years after completion. The project is subject to the rent requirements for at least 15 years, with significant tax penalties if discontinued early. Refinancing can result in restart of the 15-year period.
The rent that can be charged for a unit under Section 42 depends, among other things, on the location of the property. Tax credit properties must include units for low-income persons. At a minimum, at least 20% of the units
must be occupied by households whose income is at or below 50% of the County Median Income (CMI) or at least 40% of the units must be occupied by households whose income is at or below 60% of CMI.
Gross rent paid by tenants may not exceed 30% of the applicable qualifying income as adjusted for household size. If utilities are paid directly by the tenant, the maximum rent must be reduced by the amount of the utility allowance (determined according to program requirements).
Section 42 units are usually only found in projects much larger than yours because the program involves a lot of paperwork both in the beginning and throughout the required term.