What Is Section 42 Housing and How Does It Work?

Section 42 housing is privately owned rental housing built or rehabilitated with federal Low-Income Housing Tax Credits, where rent is capped based on the area’s median income rather than the market. The name comes from Section 42 of the Internal Revenue Code, which created the credit. Developers who agree to reserve units for lower-income households receive tax credits in return, and those affordability rules stay in place for decades. Unlike a Section 8 voucher, the subsidy is baked into the building, so you apply directly to the property, not to a housing authority.

Who Qualifies Based on Income

Eligibility is tied to Area Median Income (AMI) for the county or metro area where the property sits. HUD publishes updated AMI figures for every area each year, and those figures set the cutoff.¹ The specific threshold you have to fall under depends on which “set-aside test” the property chose when it applied for its credits.²

Under the 20-50 test, at least 20 percent of the units go to households earning 50 percent or less of AMI.
Under the 40-60 test, at least 40 percent of the units go to households at 60 percent or less of AMI. Most Section 42 properties use this one.
Under income averaging, at least 40 percent of units are income-restricted, individual units can be designated anywhere from 20 to 80 percent of AMI, and the average across those units cannot exceed 60 percent.

In practice, 60 percent of AMI is the ceiling you will run into most often. Some properties also reserve units at 50 or 30 percent of AMI for deeper affordability. What counts toward income is total gross household income for every person in the unit: wages, Social Security, pensions, public assistance, and other recurring sources.

If the property is in a rural area, the income cap is measured against the higher of local AMI or the national non-metropolitan median income, which can help households qualify in areas where local median income is unusually low.³

The Full-Time Student Rule

A household made up entirely of full-time students generally cannot rent a Section 42 unit. The rule exists to keep affordable units out of the hands of groups of college roommates. If even one member of the household is not a full-time student, the rule does not apply and you only need to meet the income limits.

A household of all full-time students can still qualify in five situations:³

The students are married and file a joint federal return.
The household is a single parent with their children, and none of them are claimed as dependents by someone outside the household.
A member was previously in foster care under a state child welfare plan.
A member is enrolled in a job training program that receives federal, state, or local funding.
A member receives assistance under Title IV of the Social Security Act, which includes TANF.

Student status is verified for each person in the household during the application process.

How Rent Is Set

Section 42 rent is not tied to what you personally earn. It is capped at 30 percent of an “imputed income limitation” attached to the unit itself, divided by 12 for a monthly figure.³ That limitation comes from two things: the AMI percentage the unit is designated at (usually 60 percent), and an assumed household size based on the number of bedrooms, not on how many people actually live there.

The assumed household sizes are 1 person for a studio or SRO, 1.5 for a one-bedroom, 3 for a two-bedroom, 4.5 for a three-bedroom, and 6 for a four-bedroom. So for a two-bedroom unit at 60 percent AMI, the manager pulls the income limit for a three-person household at 60 percent AMI, takes 30 percent of that annual number, and divides by 12.

If you pay utilities directly, a utility allowance reduces what you owe the landlord. The overall cap stays the same, but the allowance carves out an estimated share of it for utilities. Because HUD updates AMI figures each year, the rent cap can move. Annual increases are limited to the greater of 5 percent or twice the change in national median income, and never more than 10 percent in a single year.¹

How to Find and Apply

There is no central office that takes Section 42 applications. Each property runs its own leasing. To find properties near you, use the HUD LIHTC database, which is searchable by state, city, or zip code.⁴ Your state housing finance agency’s website is another good starting point, since the agency issued the credits and tracks every property in its portfolio.

Contact the leasing office at each property that interests you. Waitlists often run months or years in high-cost areas, so people commonly sign up at multiple properties at once. When your name comes up you will submit documentation and go through income verification, a credit check, and a background check.

Expect a non-refundable application fee for the background and credit checks, typically around $50 or less, though some states cap fees lower or prohibit them. Security deposits are set by state law, not the LIHTC program, and generally run one to two months’ rent. Fair housing law applies to every Section 42 property. Federal law does not require these properties to offer a formal appeals process if you are denied, but some state agencies and individual properties do; if you are turned down, ask for the reason in writing.

Documents to Have Ready

Property managers verify income carefully because the owner’s tax credits depend on getting it right. For every adult in the household, bring several months of consecutive pay stubs and the most recent federal tax return. Add benefit letters for Social Security, pensions, or public assistance. Employers and financial institutions are usually contacted directly to confirm what you submit.

You also need documentation of assets: bank statements, investment accounts, and any real property you own. For 2026, if your household’s total net assets are below $52,787, you can self-certify their value, and the manager imputes income using a standard passbook rate of 0.40 percent. Above that threshold, actual asset income has to be documented and calculated in full. All of this feeds into an Income Certification form that stays in the property’s compliance file. Gathering everything before your leasing appointment prevents delays.

What Happens If Your Income Goes Up

Rising income after move-in does not automatically push you out. As long as you qualified when you signed the lease and the unit stays rent-restricted, you can stay.³

The trigger point is 140 percent of the income limit for your unit. Below that, nothing changes: your unit keeps its low-income status and your rent stays capped. If your income crosses 140 percent, the “next available unit rule” kicks in. You are not evicted. The owner simply has to rent the next comparable unit that opens up in the building to an income-eligible household. If the owner does that, no penalty. If they rent the next comparable unit to another over-income household, every over-income unit of that size or larger loses its low-income status, and the owner’s credits are at risk.³

Annual Recertification

Most properties recertify tenant income once a year. You will submit updated pay stubs, tax returns, asset statements, and student documentation, essentially a lighter version of the move-in process. The property needs current records to prove compliance during IRS or state audits.

There is one exception. In a building where every residential unit is LIHTC-designated, the annual recertification requirement is waived, because there are no market-rate units and any over-income applicant would be caught at move-in. In a mixed-income building, expect the full annual review. Missing a deadline creates compliance problems for the property, and managers follow up persistently, so treat the yearly paperwork as part of keeping the unit.

1
HUD USER. Income Limits
2
GovInfo. Section 42, Low-Income Housing Credit Average Income Test Procedures
3
Office of the Law Revision Counsel. 26 U.S.C. 42 – Low-Income Housing Credit
4
HUD USER. LIHTC Database