Tenant Qualifications for Section 42 Tax Credit Programs


One of the initiatives undertaken by the federal government to address the issue of affordable housing is known as Section 42 of the Internal Revenue Code. Residents with low incomes who live in areas with high incomes and high rents, such as the San Francisco Bay Area, stand to profit the most from this programme. Residents have a chance to participate in the programme if their income falls under a certain range relative to the typical earnings in the region.

What is Section 42?

There are two concerns that are addressed in Internal Revenue Code Section 42:

It does this by offering tax incentives to investors who create housing that is within accessible price ranges. It specifies a system for assessing the income eligibility criteria and the maximum allowable rental expenses for prospective Section 42 renters. Potential Section 42 renters are required to spend no more than thirty percent of their yearly income toward housing expenditures.

Low-Cost Housing for High Cost Areas

The decade of the 2000s saw unprecedented growth in the Bay Area, both in terms of the region’s average residential income and the cost of renting housing. The richest one percent of people in San Francisco, as measured by income, made more than $558,000 in 2015, which is almost double the average income earned throughout the country. It should come as no surprise that such a high level of wealth has resulted in the Bay Area experiencing the most expensive property market in the whole nation in 2017. For example, in San Francisco in 2017, the monthly rent for a one-bedroom apartment was more than $3,000 per month. [Citation needed] In Oakland, which has historically been known for its low housing costs, the exact identical unit leased for more than $2,000 per month.

A specific advantage of the Section 42 affordable housing programme for inhabitants of the Bay Area is that, under Section 42, each county and metropolitan area has the authority to decide the income and rental limit standards that apply to that particular region. To put it another way, a property developer can meet the requirements for Section 42 tax credits in a high-income region such as the Bay Area by constructing apartments with rental prices that are significantly higher than those that might meet the requirements in a relatively low-income region such as Gary, Indiana. In a similar vein, a resident of the Bay Area may qualify to rent Section 42 housing with an income that is substantially higher than the income required to qualify in an area with an annual mean income that is significantly lower.

How It Works

The local administrators of the Internal Revenue Service in each county in the Bay Area decide the maximum amount of rent per month that a developer is allowed to charge for a specific type of unit (one-bedroom, two bedroom, etc.). The construction of such units and the placement of them on the market at the qualifying rental rate both make the developer eligible for a credit against their federal income taxes. The developer is required to continue renting the units at these below-market rental prices and may only rent them to eligible tenants for a certain number of years after construction, with the exact number of years varying based on the year in which the original construction took place.

Participants in the programme are required to have an annual income that is equal to or less than sixty percent of the mean income for their county. In addition to establishing maximum income levels, Section 42 of the Act stipulates that developers may collect a rental fee that is no more than thirty percent of the renter’s total income. For instance, a tenant with an annual salary of $55,320, which is equivalent to 60 percent of the AMI in San Francisco, would be expected to spend a maximum of $1,383 per month for a studio apartment in the year 2017. If same tenant had an income that was 50 percent of the AMI, his maximum monthly payment for the identical unit would be $1,153.

According to Section 42, the combined incomes of all prospective tenants of a qualifying apartment are added up. The maximum amount of income that can be considered qualifying also increases in proportion to the number of people living in the apartment, while the maximum amount that can be spent on rent remains the same. In San Francisco, for instance, a group of three people with a maximum combined income of $74,700 are permitted to rent a two-bedroom apartment at the going rate of $1,481 per month for the unit. If their combined salary is just half of the area median income, then they will be able to rent the same apartment for $1,234 per month.