Tax Information: What Is Irs Section 42?

A brief explaination of IRS Section 42, qualifications, standards and application process.

IRS section 42 is a tax credit system set up for owners and developers of low-income housing developments to encourage them to build and maintain housing for lower income families. Under section 42 non-profits and private developers can receive tax credits for properties that they rehabilitate specifically for use by low-income families. It can be used in conjunction with other tax breaks and programs to make providing low-income housing more affordable.

Under the tax credit 9% of the acquisition, construction or rehabilitation cost of the property can be written off for 10 years. This can provide a great amount of savings in an investment that otherwise might loose someone a great deal of money. With the tax credit the building and development of low-income housing can be a win- win situation. The tax credit enables developers and non-profits the ability to provide quality housing to people that otherwise might not be able to afford it.

In order to qualify for the credit a development must be able to meet several criteria put out by the local and federal government. The credit is available only on units that are rented to low-income families. In instances where residents are both low income and higher income; a certain percentage of the residents must be able to be classified as "low income" For instance 20% of its units rented to households with incomes of 50% or less of area median income; or at least 40% of the units must be rented to households with incomes of 60% or less of area median income.



In order to use the credit for building you would first need to apply for the credit through the IRS and get approved. Under the credit several provisions apply.

1. All available units must be rented to qualified residents -Those of a low-income status must get residences on a first come basis. If a low-income person wants a residence that is currently being occupied by a non-low income resident then the building will loose its low-income status, and it's tax credit.

2. A current resident may move within the same low-income building

3. Rule applies to each building separately - In a complex with several buildings each one would count toward the credit separately and must qualify separately.

4. Effect of violation available rule (If you violate the low-income rule in one apartment, then all apartments in the same building will loose their status)

If you choose to apply for a tax credit under section 42 make sure you and your accountant fully understand the rules and regulations associated with it. A violation in one apartment in a building can in many cases mean that the entire building is no longer eligible for the credit so it's better to understand potential problems before they happen, rather than afterwards. Section 42 is a good programs, but also one whose rules must be followed very carefully to avoid be disqualified.

Section 42 overall is an excellent way the government is trying to assist with the housing needs of all of its residents. By giving the tax credit groups are able to provide housing where there may have not been, and to people whom otherwise might have not been able to afford it.

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